Loan Agreements and Corporations

Loan Agreements and other financial instruments are of vital importance for the correct development and growth of corporations and their projects.

Benjamín Schmitz B.

Definition and Content

Financing and refinancing are key activities in the strategy of every company. To carry on their projects and achieve their goals, they search for financial aid granted by Banks and financial entities (Insurance Company, funds, etc.), which have created a variety of instruments to provide money under the obligation of repayment under certain terms and conditions.

Regarding the above mentioned, we must understand two main types of financing:

1.- Internal Financing: this kind of financing has its origin in the own resources of the company. Among these, we can find new equity and the capitalization of undistributed utilities.

2.- External Financing: this kind of financing has its origin in external sources and are obtained throughout loans or debt.

In this article, we will focus mainly on the External Financing and, within this category specifically, what we know as Loan Agreements.

We must first refer to the definition given by Art. 2196 of the Chilean Civil Code, which establishes what we understand as a loan agreement or consumer loan, saying that it is “… a contract in which one of the contractors gives the other a certain amount of fungible things under the obligation of paying other amount of the same genre and quality.” The referred contract constitutes the base of all other legal/financial formulas which companies use to obtain funds, in which they look for a bank or financial entity that gives them a determined amount of money, which will be paid back in the future by the borrower, under the terms and conditions that they agree on.

There are different kinds of LOan Agreements. As part of them, we find the loan agreement, the credit opening contract and the discount contract, among others.

Regarding the first of the aforementioned, and being the most prevalent figure adopted by companies asking for financial aid to a Bank or other financial entity, there are two key elements:

1.- The Restitution of the borrowed money: it is the main obligation of the borrower, who must reimbursed the money received from the Bank or financial entity under the terms and conditions previously agreed on.

2.- The payment of interests: it constitutes the retribution that the bank receives for having loaned the money. In simple words, it is the price the borrower pays for the funds that have been borrowed.

Importance and Purpose

The relevance of Loan Agreements is evident. They represent a source of funds to companies in different stages of their development. Their use incentivizes economic growth, allowing companies to carry on their businesses and projects in stages where they may not count with enough internal financing or when they want reduce the risks involved using their own equity. They represent a great funds source, a tool that companies can (and in many cases must) look for, in the search of achieving bigger business goals and objectives.

Final Observations

Financial Contracts are a necessary and adequate tool for businesses to get funds. Whether it’s ongoing projects or new ones, the possibility of getting money out of financial entities and banks is of the utmost importance to start a business or to reach new horizons.

As we said, this type of contracts can take different forms, depending on the needs and the particular situation of each borrower. As a general rule, this instruments always imply money being given by a bank, and the borrowers payment in a future date, who must comply with the conditions, forms and dates that were agreed on, including the payment of a price for the money that was lent, which corresponds to the interests agreed on and received by the bank.

Regardless of the specific form that these contracts may have, they greatly contribute to economic development. They allow the existence of major projects, letting businesses incur in debt and finance their needs.

Given their relevance, both for the lender and the borrower, the drafting and negotiation of loan agreements and other financing documents (promissory notes, guarantees and liens, among other documents) imply counting with an experimented law counseling that adequately secures the legitimate interests of both parties: /i/ for the lender, the timely and safe payment of capital, interests and other financial costs, and /ii/ for the borrower, the prompt disbursement of the money borrowed once the conditions precedents are fulfilled.

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