Loan agreement between Heusden and Haarsteeg: what you can learn from it

A loan agreement is a written contract in which you record that you are lending money, under what conditions this occurs, and how it will be repaid. Anyone lending money to a family member, friend, or their own business would be wise to put at least four things in writing: the amount borrowed, the interest rate, a repayment or payment schedule, and the collateral. The loan agreement between the Municipality of Heusden and the village of Haarsteeg from 2018 clearly demonstrates why these agreements matter, including for entrepreneurs in the SME sector.

In short: what belongs in a loan agreement?

• The amount: how much is being borrowed and when it will be paid out.
• The interest: whether interest is charged and how high it is.
• The repayment schedule: in which installments and on which dates repayments are made.
• The securities: what the lender can invoke if the borrower fails to repay.
• Special agreements: for example, early repayment, enforceability in the event of default, or repayment in kind.

An oral agreement is legally valid, but without a written record, it is almost impossible to prove in the event of a dispute. Moreover, for loans involving a business, the tax substantiation plays a role.

What is a loan agreement?

A loan agreement (also known as a loan contract or loan agreement) is the written record of a loan between two parties: the lender and the borrower. It is not a legal requirement to put a loan in writing, but it is strongly recommended. A verbal agreement is often difficult to prove legally, and in the event of a dispute, you are left empty-handed.

The Haarsteeg case is a striking example. Alderman Thom Blankers called the agreement unique in late 2018: according to reports, the municipality of Heusden lent approximately 450,000 euros to boost the quality of life in the church village of Haarsteeg. Although that was public news, at its core it concerned a well-thought-out legal agreement. And it is precisely that structure that contains lessons relevant to you as an entrepreneur as well.

Financial agreements: interest and payment schedule

Lending money always has a business aspect. According to reports, an annual interest rate was agreed upon in the agreement between Heusden and Haarsteeg. That is more logical than it seems: during the term of the loan, inflation erodes the value of the amount, and you miss out on interest that you could have received elsewhere. A reasonable interest rate compensates the lender for this.

For entrepreneurs, there is an additional factor at play here. If you lend money to or from your own business, the Tax and Customs Administration checks whether the loan business-related . In short, this means: market-based terms, a realistic interest rate, a repayment schedule, and written documentation — comparable to what a bank or an independent third party would agree upon. If the terms deviate too much, the tax authorities may classify the loan as non-business- related, with tax consequences. The exact rules and any applicable rates depend on your situation and are subject to change; therefore, have this reviewed before you formalize any agreements.

In addition to the interest rate, every loan agreement should include a clear payment or repayment schedule. When will repayment take place, in what installments, and what happens in the event of late payment? Establishing this in advance prevents disputes later on.

How high can the interest rate be?

Between private individuals, you are in principle free to decide whether and how much interest to charge. As soon as a business is involved, the Tax and Customs Administration checks whether the interest is in line with market rates: interest that is too low or missing can lead to tax adjustments, while excessively high interest can raise other questions. What counts as market-rate depends on the risk, the term, and the collateral. Have this assessed before you set a percentage.

Reimbursement: also possible in kind

In the agreement between Heusden and Haarsteeg, it was agreed that Haarsteeg would repay partly in kind, through social projects. This illustrates a principle that many people are unaware of: repayment does not always have to be in money.

When lending to a friend, family member, or business partner, you can also agree to provide (part of) the consideration in kind. Is someone borrowing money to realize a project? Then you can agree that part of the value will be returned in another way. However, ensure that such agreements are concretely and measurably documented; otherwise, ambiguity will arise later regarding exactly what “paid off” means.

Build in safeguards

With the borrowed money, the village of Haarsteeg intended to acquire a party center. Therefore, a safeguard was included in the agreement: should the project fail, the municipality of Heusden would acquire a first right of purchase on the property. In this way, the lender limited his risk.

That principle applies to every loan. If you lend a substantial amount, build in collateral so that you are not left empty-handed if the borrower is unable to repay. Common options include:

• Surety: a third party (for example, the borrower's partner or a director) personally guarantees the repayment.
• Pledge or mortgage: the borrower pledges an investment, inventory, or real estate as collateral.
• No change of ownership clause: with a loan for a business, you can agree that control may not simply change.
• First right of purchase or repurchase on an object financed with the loan, as in the Haarsteeg case.

The type of security appropriate depends on the amount, the term, and the relationship with the borrower. Also read our page on sureties in a loan agreement if you wish to have a third party act as guarantor.

What if the borrower does not repay?

No matter how good the agreements are, payment arrears do occur. A written loan agreement with a clear repayment schedule is then your most important piece of evidence. With this, you can formally put the borrower in default and, if that does not help, have the debt collected.

If payment is not received, a debt collection process offer a solution. The stronger your agreement is drafted, the easier it is to recover your money. Conversely, a vague or verbal agreement makes collection difficult and costly.

A loan agreement is custom-made

A good loan agreement contains much more than just the amount and the interest rate. Consider the type of interest, the payment schedule, collateral, security, and tax aspects. In such an agreement, contract law, property law, the law of obligations, and tax law come together. It is precisely this combination that makes it complex — and a standard template from the internet rarely covers all risks.

Do you want to be sure that your loan is legally and fiscally sound? Then have the agreement drafted or reviewed by a specialist. View our page on loan agreements or read more about our contract law.

Frequently asked questions about the loan agreement

Is a loan agreement legally required?

No, in principle a loan is valid even without a written contract. However, without documentation, an agreement is difficult to prove. Moreover, for loans to or from a business, written documentation is important to be able to substantiate the loan as business-related for tax purposes.

Do I have to charge interest if I lend money?

For a loan between private individuals, you are in principle free to decide whether and how much interest to charge. However, if the loan involves a business, the Tax and Customs Administration checks for a market-rate, realistic interest rate. Interest that is too low or missing can lead to tax adjustments. Therefore, have your situation assessed in advance.

What securities can I include in a loan agreement?

Common securities include a suretyship, a pledge or mortgage, a right of repurchase or pre-emption, and a no change of ownership clause. Which combination is appropriate depends on the amount and the risk.

Can I have a loan repaid in kind?

Yes, you can agree that (part of) the repayment takes place in goods or services. However, be sure to specifically record which performance corresponds to which amount, so that there is no dispute regarding what is still outstanding.

What is the difference between a loan agreement and a private loan?

These terms are often used interchangeably. A private loan usually refers to a loan between parties directly, bypassing a bank — for example, between family members or a director-major shareholder and their own private limited company. The loan agreement is the contract in which you record such a loan. Therefore, a private loan is recorded in a loan agreement.

What do I do if the borrower doesn't repay?

First, put the borrower in default in writing based on the agreement. If that does not help, you can have the debt collected through a debt collection process. A well-drafted agreement makes this considerably easier.

Have your loan agreement drafted or reviewed

Are you unsure whether your loan is legally and fiscally properly arranged? The legal experts at MKB Juristen draft custom loan agreements and critically review existing contracts. This way, you avoid unnecessary risks and can be certain that your arrangements are correct.

Schedule a no-obligation intake and discuss your situation with a specialist.