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Investment or Loan: Why Does It Matter

by | Mar 22, 2021 | Business, Contracts, Featured, Law

“Who in their right mind would give Ringgit Malaysia (RM) 1,000,000.00 without a written agreement?”

A question I used to ask a lot before I realized that there are A LOT of people who do this. We are not talking about the corporate companies or the legal literate business owners. These are businesses who have never understood the importance of a written agreement nor do they know any lawyers to guide them. It is a case of “they don’t know what they don’t know”.

The key issue that will be in dispute when there is no written agreement is – was the money an Investment or a Loan? Why is this distinction important?

Investment

  1. There is an element of risk-sharing between investor and business owner;
  2. Repayment is dependent on the success of the business / project;
  3. Element of profit-sharing is allowed under the law.

Loan

  1. No risk to the lender;
  2. Loan must be repaid regardless of the success or failure of the business / project;
  3. Charging interest on the loan may breach certain laws, especially the Money Lenders Act, if not structured properly and legally.

Way too often, disputes WILL arise if there is no written agreement – whether is it an Investment or is it a Loan. Failure to put this down in writing will go to the fundamental of things – the REPAYMENT of the monies. The party giving the money will want their money back; the person receiving the money may not be able to pay back and will want to delay repayment (or not repay back at all).

However, the beauty of having a written agreement is that, parties can custom their agreement with the clauses that THEY want; the clauses that reflect the true intention of the parties in their business relationship. Not every business relationship is the same. Having a custom-made agreement that reflects the intention of the parties not only ensures less disputes between the Parties but also ensures that parties don’t feel short changed.

The law is there to help facilitate business. Use it.

Feel free to drop by our website at www.law-aka.com to find out more.

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