Investor and lender contracts are an integral part of the business world today. Without them in place, businesses, and the investors and lenders that support them, could all be at a disadvantage. Investors might not get a return on their investment, lenders might be shorted in repayment of interest or the principal payment, and businesses might not be able to survive without the extra cash flow.

In order for investors, lenders, and businesses to better protect themselves and be clear on contract expectations, it is highly advised for these parties to seek legal assistance from a qualified attorney in drafting and facilitating investor and lender contracts.

What Is an Investor Contract?

At its heart, an investor contract, sometimes referred to as an investment contract, is one in which an individual or an entity invests money in a business or similar operation with the expectation of a return on their investment. Though these are most commonly used within the real estate industry, they are applicable across a wide variety of industries.

Investor contracts are typically used when a company wants to increase the odds of their success by having a person or entity contribute seed money or starter funds to get the business off the ground. Two additional side benefits to having someone invest in your company can be that it may allow the business to grow faster while potentially improving its reputation.

Common Elements of Investor Contracts

The secret to success for almost any contract is the level of detail it incorporates. This should leave little to no gray area regarding expectations for outcomes.

On a basic level, investor contracts should include information such as:

Participating parties

This includes the full legal names of these parties as well as their physical and mailing addresses. This creates a clear sense of identity for the contract.

Purpose of the investment

From the business’ standpoint it is critical to be specific about exactly what the investment will be used for and the expected outcome of that use.

Investment details

This is a rather broad term for what refers to the building blocks of the entire contract. At minimum, this should include how much an investor is investing, what form the investment will take (cash, wire transfer, etc.), and when it will be transferred. This also includes determining how an investor’s ROI will be paid.

Determination of investor roles

Depending on the nature and amount of the investment, some investors may request special privileges such as holding positions on the company’s board or having some say in company operations. The determination of an investor’s roles should be listed clearly in this contract.

Identification of investor expectations

Because an investor is putting funding into a company, they may ask to be kept abreast of progress via reporting or audits. If this is to be a part of the agreement, it must go into the contract and be as detailed as possible to prevent miscommunication down the line.

Investment risks

If there are known or anticipated risks for an investment, it should be included in the contract. Especially if there are inherent risks, a company should be forthcoming so potential investors understand that there is not a guaranteed return on investment.

Dates and signatures

In order to make it official, all participating parties must sign and date the investor contract.

What Is a Lender Contract?

A lender agreement, sometimes called a loan agreement, is a contract between a borrower and a lender. It is designed to detail information about the loan being made and the borrower’s intent to repay the money.

This type of contract’s general purpose is to list out and define the details and timing of the loan so that expectations for both parties are clear. Should a disagreement or challenge arise from a lender contract, it could potentially go before a court of law for dispute.

Common Elements of Lender Contracts

When it comes to businesses, a lender contract is usually designed to allow a company more cash flow for expansion or equipment, or simply to stay afloat until business picks up and it can comfortably pay its debts and expenses. Because lender contracts are tailor-made to accommodate each unique lender/borrower situation, the common elements are often the same, but the details can vary:

Identification of the lender and borrower

This can include basic information such as full legal names, addresses, and more.

Principal amount being borrowed

This defines the exact amount of funds being borrowed from the lender.

Interest

When a loan is made, the entity borrowing it generally pays it back with interest. Lenders contracts should specifically identify exactly how that interest will be determined. Although interest is usually a percentage of the principal amount borrowed, there are limits in place to prevent excessive abuse of percentages.

Payback date

Sometimes called the maturity date, this contract element is designed to determine the exact date (and time if applicable) the loan is to be repaid with interest.

Default terms

It is necessary to envision a scenario in which timely repayment does not happen according to plan. This provision would elaborate on acceleration dates, penalties and interest, and what rights and remedies the lender would have in the event of default.

It is worth mentioning that entering into a loan without a lender contract can be detrimental to all parties involved. A lender could stand to lose any money they loaned the borrower and may not have any legal recourse. A borrower could suddenly be short on cash flow if a lender decides to spontaneously collect on a loan.

Hiring a Houston Attorney for Investor and Lender Contracts

Agreements can be made all the time between two or more parties, but without the right forms and procedure in place those agreements can be worthless. When it comes to investor and lender contracts, working with an experienced and reputable attorney can provide peace of mind via the following:

  • A seasoned attorney will know exactly what elements are required to ensure that an investor and lender contract is considered valid and would hold up in a court of law.
  • Knowledge of legal terms. There can be a distinct advantage in using proper legal verbiage in these contracts. An attorney will know how to put an investor, lender or business’ desires into a more proper format that will be recognized in a court of law.
  • Reduction of errors due to customization. With many of these contracts being so unique in their terms, too much customization of the documents can lead to accidental and unfortunate errors and loopholes. Having an attorney there to oversee the drafting of the document from start to finish can help reduce the number of mistakes.
  • Court representation. Should a dispute come from investor or lender contracts, a reputable business attorney can defend your case in the courtroom.

Investor and lender contracts can be daunting and complex, with the potential to leave your rights unprotected if they are not reviewed by an attorney. Do not leave your next business deal to chance. Reach out to us today.