An indemnity is a legally binding promise by one party (the indemnifier) to compensate another (the indemnified party) for specified losses, costs, or liabilities. In a business loan agreement, indemnity clauses set out situations where the borrower must reimburse the lender for losses arising from particular events — such as a breach of warranty, a misrepresentation, or a change in law that increases the lender's costs.
Indemnity versus warranty
A warranty is a contractual statement of fact; if it turns out to be false, the innocent party can claim breach of contract damages. An indemnity goes further — it provides a direct right of reimbursement regardless of foreseeability, which is why lenders and sophisticated buyers often prefer them. Recovering under an indemnity is generally faster and more certain than a damages claim.
Common indemnity provisions in loan documents
- Break costs: If you repay a fixed-rate facility early and the lender suffers a funding loss, an indemnity clause may require you to cover that shortfall.
- Increased costs: Regulatory changes that raise the lender's cost of capital may be passed to the borrower via an indemnity.
- Tax indemnity: The borrower agrees to gross up payments if withholding tax is deducted, ensuring the lender receives the full contracted sum.
Reading indemnity clauses
Before signing, identify every indemnity, consider the realistic scenarios in which it could bite, and take legal advice if any clause is broadly worded. A well-run lender will explain each clause in plain terms on request.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What does default mean on a business loan?, What is a fixed charge on a business asset?.