What is this document?
An impact loan agreement is a contract between a social enterprise (the Borrower) and an impact-focused lender under which the lender provides a loan that is linked to the Borrower's social and/or environmental performance.
Unlike a standard commercial loan, the interest rate on an impact loan can go down if the Borrower achieves its agreed impact targets, and up if it does not. This template is drafted so the Borrower draws the full loan amount in one go and repays it in instalments over time. The loan can be secured or unsecured.
Why is this important?
For social enterprises, access to capital is often the greatest barrier to growth and impact.
An impact loan recognises that the Borrower's purpose is not purely commercial, it formally embeds the Borrower's mission into the lending relationship, creating financial incentives to deliver on social and environmental commitments. It also provides a framework for transparent impact measurement and reporting, which builds trust with funders and can unlock further investment.
For lenders, it provides a mechanism to ensure that concessional or impact-focused capital is genuinely being used for its intended social purpose.
How does the Impact Loan Agreement relate to the other Toolkit documents?
The Impact Loan Agreement is a standalone debt instrument. Unlike equity investment (where the Toolkit Term Sheet leads to the Subscription Agreement and Shareholders Agreement), an impact loan is typically documented in a single facility agreement (this template) together with any ancillary security documents.
However, if a social enterprise is raising both debt and equity:
- The Shareholders Agreement's "Restricted Dealings" provisions (requiring Board or Shareholder approval for new debt or security interests) may affect the Borrower's ability to enter into the Impact Loan Agreement without shareholder consent.
- The Impact Loan Agreement's "Restricted Dealings" undertakings (prohibiting distributions without Lender consent) may affect the Company's ability to pay dividends to shareholders.
- If both debt and equity are being raised together, the documents should be negotiated simultaneously to ensure consistency.
What type of loan is this?
This template is structured as a single lender, single advance, amortising, non-revolving cash advance facility. In plain language:
Single advance
The Borrower draws the entire loan amount in one lump sum. There is no ability to draw the loan in stages.
Amortising
The Borrower repays the loan in scheduled instalments of principal and interest over the life of the loan, rather than repaying the entire principal in a lump sum at the end.
Non-revolving
Once principal is repaid, it cannot be re-borrowed. The available loan limit reduces permanently with each repayment.
If a revolving or multi-draw structure is more appropriate, the template will need to be amended and legal advice sought.
Secured versus unsecured loans
What is the difference?
A secured loan is one where the Borrower grants the Lender a legal right over its assets as a form of protection. If the Borrower cannot repay, the Lender can enforce that security by taking control of and selling the secured assets to recover what it is owed. The Lender also ranks ahead of other unsecured creditors in the event of the Borrower's insolvency.
An unsecured loan relies solely on the Borrower's promise to repay. The Lender has no priority claim over specific assets and ranks alongside other unsecured creditors if things go wrong.
When is security typically required?
Security is more commonly required where:
- the loan amount is significant relative to the Borrower's assets or revenue;
- the Borrower is early-stage;
- the Lender is offering concessional terms; or
- the Lender's own mandate requires it.
Some impact lenders deliberately offer unsecured loans to reduce the burden on the Borrower. The choice is a commercial negotiation and the interest rate offered may be higher for an unsecured loan to account for the additional risk. Any existing security interests granted by the Borrower will need to be taken into consideration.
How does this template handle both options?
The template accommodates both. Throughout the document, bracketed instructions indicate which provisions to delete depending on whether the loan is secured or unsecured:
If unsecured:
- Part E (Security) is to be deleted in its entirety if the loan is unsecured.
- The defined terms "Secured Money", "Secured Property", "Security" and "Receiver" are deleted
- Security-related default events (e.g. loss of ownership of secured property, loss of priority ranking) are deleted if unsecured.
If secured:
- "Money Owing" is to be deleted.
Under this template, if the loan is to be secured, the Borrower agrees to provide security to the Lender under a general security deed over all of its present and future assets (including bank accounts, equipment, intellectual property, and contracts). If you require a general security deed, we recommend seeking further legal advice on the terms of the security arrangement and your rights under the agreement.
Interest and payment
How does the Borrower draw the loan?
The Advance Notice is a formal written request from the Borrower to draw the loan. It must specify the amount, the proposed Advance Date, and the account for proceeds. It includes a representation and warranty that no Default subsists and that all representations remain correct. It is irrevocable once received by the Lender.
Before the Lender is obliged to advance the loan, the Borrower must deliver the items listed in Schedule 2 (in form and substance satisfactory to the Lender) at least 3 Business Days before the Advance Date.
How does interest work?
The annual interest rate is specified in Schedule 1. It is a fixed rate that may be adjusted up or down depending on whether the Borrower meets its agreed Target Impact. Interest is payable "in arrears", meaning the Borrower pays for the interest that has built up over the preceding period. Payment is due on each Payment Date (which falls at the end of each Interest Period) and on the final Maturity Date.
What happens if a payment is late?
If the Borrower fails to pay any amount on its due date, a higher default interest rate kicks in, being the standard Interest Rate plus an additional margin specified in Schedule 1. This applies to the overdue amount from the due date until it is actually paid.
How is the loan repaid?
The Borrower repays the loan in instalments of principal and interest according to the repayment schedule in Schedule 1, commencing on the first Payment Date after the Advance Date. On the Maturity Date (or the date on which all amounts become due early following a default), the Borrower must repay everything still outstanding.
Can the Borrower repay early?
Yes. The Borrower may prepay all or part of the Outstanding Amount without penalty by giving the Lender at least 10 Business Days' irrevocable notice. Prepaid amounts cannot be redrawn.
What is mandatory prepayment?
This is an optional provision. If included, the Borrower must apply specified amounts from particular sources to prepay the loan. Common examples for social enterprises include:
- R&D Tax Incentive payments: If the Borrower receives a cash refund from the Australian Taxation Office under the Research and Development Tax Incentive, the parties may agree that some or all of that amount must be applied to prepay the loan.
- Distributions from an aligned entity under a donation model: Some social enterprises operate alongside a related for-profit entity that donates profits to the social enterprise. If the Borrower receives such distributions, the parties may agree those amounts are applied to prepay the loan.
If mandatory prepayment is not appropriate, the clause should be deleted.
Use of proceeds
The Borrower must use loan proceeds exclusively for the purpose specified in Schedule 1 or approved in writing by the Lender. The Borrower must establish and maintain systems to track and allocate proceeds to eligible impact activities in accordance with the Target Impact and Schedule 4 and maintain records demonstrating compliance.
How does the impact mechanism work?
This is the core feature that distinguishes an impact loan from a standard commercial loan. It creates a financial incentive for the Borrower to achieve its social or environmental targets.
What is the Target Impact and how is it measured?
The Target Impact is the set of agreed social and environmental outcomes and Key Performance Indicators (KPIs) set out in Schedule 4. This is customisable by the parties. The Borrower must ensure that the Target Impact is:
- ambitious and tied to a material improvement against predetermined benchmarks;
- based on recent performance data (typically the previous 6-12 months);
- aligned with the Borrower's overall strategy and social objectives; and
- measured against clear baselines and methodologies.
What happens if the Target Impact is met? (Impact Discount)
If no Default is subsisting and the Borrower meets or exceeds the Target Impact metrics, the Interest Rate is reduced by the Impact Discount. This discount is not paid out in cash, but subtracted from the next interest payment the Borrower owes.
For the first measurement period, if the Borrower hits its impact targets, the interest rate reduction is applied backwards, covering the period from when the money was first drawn down. This rewards the Borrower from day one, even though the results weren't confirmed until later.
For all later periods, the discount applies going forward from the Impact Review Date. If a Default occurs during a period in which the Impact Discount is being applied, the discount ceases from the date of that event.
What happens if the Target Impact is not met? (Impact Penalty)
If the Borrower fails to meet Target Impact and does not have reasonable cause for underperformance, the Lender may consult with the Borrower on remediation and/or increase the Interest Rate by the Impact Penalty prospectively from the Impact Review Date.
Reasonable cause includes external factors beyond the Borrower's control (natural disasters, pandemics, economic crises), material changes in the regulatory environment, or other circumstances the Lender determines (acting reasonably). The Lender must have regard to its commitment to support the Borrower's Mission and Target Impact, provide the Borrower with a reasonable opportunity to explain underperformance and propose remediation, and consider the Borrower's progress over time rather than isolated periods.
Does missing Target Impact trigger a default?
No. An event of Default will not occur by reason only of a failure to meet Target Impact. Missing the target affects the interest rate (through the Impact Penalty) but does not, by itself, allow the Lender to accelerate the loan or take enforcement action.
Representations and warranties
Representations and warranties are factual statements the Borrower makes to the Lender about its current circumstances. They give the Lender comfort that the Borrower can take on and repay the loan. If any of these statements turn out to be materially incorrect, it may trigger a Default, which could lead to termination of the Impact Loan Agreement. The Borrower should review each of these carefully and disclose anything that might make a statement inaccurate before signing.
Key features include that they are:
- repeated on the Advance Date and on the first day of each Interest Period, meaning they must remain true throughout the life of the loan;
- capable of triggering a Default if a representation turns out to be materially incorrect, potentially allowing the Lender to demand immediate repayment; and
- different from undertakings, representations describe what is true now; undertakings are promises about future conduct.
Undertakings
Undertakings are ongoing promises about how the Borrower will conduct itself during the life of the loan. Key categories include:
Status
Maintain corporate existence, keep constituent documents, not merge without consent.
General business
Carry on business properly, use proceeds only for permitted purposes, maintain authorisations, keep proper books, comply with laws, pay taxes.
Notice obligations
Promptly notify the Lender of a wide range of events including Default, litigation, material changes, and insurance claims.
Restricted dealings
Not to (without consent or as otherwise permitted) declare distributions, enter joint ventures, create security interests, dispose of assets, enter non-arm's length transactions, incur additional debt, or provide financial accommodation.
Default and its consequences
What triggers a default?
A Default occurs if any of a specified list of events occurs and is continuing. Key examples include:
- non-payment (with a 3 Business Day grace period for banking errors);
- change to constituent documents that materially changes the Borrower's Mission;
- failure to comply with any obligation not remedied within 10 Business Days;
- a change in the persons who control the Borrower (though the parties should consider whether this trigger is appropriate given the Borrower's structure and growth stage); and
- materially incorrect or misleading representations or warranties.
Other defaults include cross default (other debt becoming due early above a specified threshold), ceasing to carry on business, insolvency, loss of material authorisations, a Material Adverse Effect, and (if secured) security-related events.
What can the Lender do?
The Lender may:
- cancel the Loan Limit;
- declare all amounts immediately due and payable (acceleration); and
- exercise any rights and remedies under the Finance Documents and at law.
In considering action, the Lender agrees to have regard to its commitment to support the Borrower to achieve its Mission and Target Impact, but nothing prevents the Lender from exercising its rights in its full discretion. This is a significant power, the Lender can demand immediate repayment of the entire loan.
Power of attorney
If a Default is continuing and the Lender has given 5 Business Days' prior written notice (except in an emergency), the Borrower irrevocably appoints the Lender as its attorney to do anything the Borrower should have done but has failed to do.
Indemnities
What is an indemnity?
An indemnity is a promise by the Borrower to reimburse the Lender for losses and costs the Lender incurs because of the Borrower's default, breach, or misrepresentation. It is a standard protection in commercial lending; it ensures the Lender does not bear the financial consequences of the Borrower's failure to perform. The Lender does not need to incur expense before enforcing an indemnity.
What does the Borrower indemnify the Lender for?
The Borrower indemnifies the Lender (and, if secured, a Receiver, Investigating Expert and Attorney) against all reasonable costs and expenses in connection with (among other things):
- enforcing a Finance Document or exercising a power;
- a breach of the Borrower's obligations; and
- a Default or Potential Default,
including legal costs on a full indemnity basis.
What does this agreement deliberately not cover?
This template is designed as a single impact loan facility between one Borrower and one lender. To keep it accessible, the following matters are not addressed:
- Syndicated lending: multiple lenders participating in the same facility.
- Revolving or multi-draw facilities.
- Intercreditor or subordination arrangements: where the Borrower has multiple lenders with different priority (including in relation to security).
- Hedging or derivatives: if the loan is linked to a floating rate or requires currency hedging.
- Detailed financial covenants: such as loan to value, debt service or interest cover ratios.
- Borrower guarantee or parent company support: where the Lender requires a guarantee from a related entity.
- Security trust: where there are multiple secured parties sharing the benefit of a single security package.
- 'Social Loan' classification: the Social Loan Principles (SLP) are voluntary guidelines setting market standards for social loans, being loans where proceeds are used exclusively for eligible social projects. Where social loans focus on what the proceeds are used for, impact-linked loans (like this template) focus on how the Borrower performs against impact targets.
These are intentional design choices. Users who require any of these features should seek legal advice.
Download the template
The Impact Loan Agreement template is available to download below. Review with your legal adviser before use.