What is a loan agreement? Explanation and use

What is a loan agreement? It is a written agreement between a lender and a borrower stating that an amount (the principal) is being borrowed and under what conditions it will be repaid. Think of interest, amortization, term, enforceability, and any collateral. The agreement applies to both private and business matters — for example, a loan between family members, between two companies, or from a director-major shareholder to their own private limited company. Legally, the loan exists even without the written agreement, but proving it afterwards is often a problem.

The short answer

• What: written agreement regarding a borrowed amount and the repayment terms.
• Parties: lender and borrower, private or business.
• Core: principal, interest, repayment, term, enforceability.
• Security: optional collateral (pledge, mortgage, surety).
• Goal: clarity beforehand and proof afterwards.
• Importance: for loans to or from the BV, also tax-related (arm's length terms).

What exactly is a loan agreement?

Legally, a loan falls under the contract for consumption (Art. 7:129 et seq. of the Dutch Civil Code). The lender provides a sum of money and the borrower undertakes to repay the same amount, usually plus interest. A loan arises merely through the meeting of minds and the disbursement — a signature on paper is not strictly necessary for its validity. Nevertheless, recording it in writing is almost always advisable: it specifies exactly when repayment is due, at what interest rate, and what happens if the borrower fails to pay.

There are two main types. With a repayment loan , you make periodic repayments until the principal is zero. With an interest-only loan, you only pay interest in the interim and the entire principal in one lump sum at the end.

Business or private — the difference

• Private. Loan between family, friends, or a loan for one's own home. With a family loan, gift tax aspects sometimes come into play if the interest rate is commercially low.
• Business-related. Loan between two companies, from an investor to a start-up BV, or supplier credit. What matters here is whether the terms are business-like — an interest rate that is too low can be viewed as a disguised profit distribution or gift.
• Director-major shareholder and private limited company. A loan from the director-major shareholder to his own private limited company, or vice versa, is a separate category. The Tax and Customs Administration scrutinizes the arm's length terms and, since the Excessive Borrowing Act, the amount borrowed by the director-major shareholder from the private limited company.

The fixed components

1. Principal amount: the borrowed amount and the payment date.
2. Interest: the percentage, fixed or variable, and when it is paid.
3. Repayment: the schedule — monthly, quarterly, or in one lump sum at the end.
4. Term: the end date or the duration of the loan.
5. Callability: when the lender is entitled to demand immediate repayment of the entire loan.
6. Security: collateral or suretyship, if agreed.

Enforceability and securities

The callability clause determines when the lender may reclaim the full outstanding amount at once — for example, in the event of payment arrears, bankruptcy, or death. Without such a clause, you can only make a demand at the end of the term, which is too late in the event of problems.

Collateral reduces the risk for the lender. The best known are pledges (on, for example, inventory or accounts receivable), mortgages (on real estate), and suretyship (a third party provides a personal guarantee). With subordination, you agree that this loan will not be repaid until other creditors have been satisfied — often a requirement of a bank.

Tax aspects of the BV

If the director-major shareholder borrows from his own private limited company, the loan must be on a business basis: a reasonable interest rate, repayment agreements, and, if necessary, collateral. If these are lacking, the Tax and Customs Administration may view the amount as disguised dividend, taxed in Box 2. Moreover, since 2023, the Excessive Borrowing Act applies: debts to one's own private limited company above a threshold (in 2024 €500,000, excluding mortgage debt) are taxed as fictitious regular income.

If the director-major shareholder lends to his private limited company, the interest received is in principle taxable, and that loan must also be business-related. A non-business-related loan may mean that an impairment loss is not tax-deductible. Always have the tax aspects of larger amounts reviewed by an accountant or tax specialist.

Honest recommendation

For a simple loan involving a small amount between people who trust each other, you do not need a lawyer — a brief written agreement specifying principal, interest, repayment, and enforceability often suffices. A lawyer only becomes useful for larger amounts, for collateral such as pledges or mortgages, for subordination, and for loans to or from one's own private limited company where tax implications come into play. In those cases, the risks of an error or an unbusinesslike agreement are simply too great to take a gamble.

Want to know more? Read how to drafting a loan agreement , view the main pitfalls, or use our loan agreement.

Frequently Asked Questions