Business Loan Agreement: What do you know before signing

Taking away your business loan means putting a burden on your business. Yes, it gives you the cash you need now. But it gives you the responsibility to repay what you borrowed, usually the interest and fee. As a result, it’s important to know what you’re into. That’s what business loan agreements are like.

A loan agreement is a document that submits all important details about a loan, from the terminology (the period of time that must be repaid) to the collateral you have made to secure the loan. You need to clearly understand all aspects of your business loan agreement before you sign a company and commit to its terms. This guide should be helpful.

What is a business loan agreement?

A business loan agreement is a legal document with a lender that outlines the details of the loan, including the amount of repayment, repayment schedule, interest rates, fees, and what happens when the loan defaults. By clarifying everything about the loan, you will serve both parties and understand what you expect and what you expect from you.

The details that a lender provides in a loan agreement will depend on your company’s financial position, from your credit score to your annual revenue. Your loan costs from interest to fees. Your loan agreement should clarify their costs.

How do business loan agreements work?

After you apply for a loan, a business loan agreement appears and the lender completes the underwriting (assessing the fitness of the loan company). The lender then approves the funding and submits a loan agreement for review. You should thoroughly review this document and ask lender questions to make sure you understand it.

You can also negotiate a loan agreement if you have points you want to change to your contract. For example, you may negotiate a lower interest rate by agreeing to establish collateral.

Please note that business loan agreements are legally binding contracts. Without having to end the bargain (repaying the loan), the contract gives the lender the ability to pursue compensation. In most cases, the lender may seize the collateral you have placed to secure a loan, and they may take you to court and seize other business or personal assets for payment.

To avoid difficulties in paying later, make sure you have enough revenue to pay back your business loan. The lender will assess your business finances, but you can also estimate the loan payments and decide whether they fit your business budget before signing the loan agreement.

This document is important in setting expectations and avoiding confusion (and potentially, even litigation). If you need to create your own contract, you can start with a business loan agreement template. Next, let your lawyer review it before you or the lender’s indication.

What does a business loan agreement include?

A business loan agreement is usually multiple pages with multiple different sections. The exact sections included vary by lender, but most loan agreements include the following sections:

Definition

This section defines the important terms used throughout the loan agreement, so we clearly consider the meanings of the various terms.

Effective date and maturity date

From the effective date, your loan agreement will be legally binding. Usually, this is the same as you earn loan revenue from a lender.

The maturity date is the date when all funds are repaid to the lender. Most loan agreements also state that lenders can accelerate this date with default on the loan.

Promising note

This statement is essentially your promise (and therefore your name) to repay your iou, what you borrowed and what you lent your interest.

terms of service

The terms and conditions of loan agreements are generally quite meaty. Lay out the following important details:

• Loan amount

• Repayment period: period to be repaid
• Repayment Schedule: When making a repayment
• Interest and fees
• Whether your lender will offer a bounty period for late payments

Potential penalties

Some business loan agreements require a clear explanation of the fine fees that can be incurred. Penalties may be explained in our own dedicated section or fall under the Terms of Use.

Specifically, you need to look for two potential penalties.

• Non-payment. If you missed payment to the lender, you will be paying this fee. Understand how much it is and whether you have a grace period or if this penalty begins soon.
• prepayment. Some lenders financially punish companies that pay off their loans before their schedule. However, not all lenders charge a penalty, and some lenders may even offer discounts to pay off early.

collateral

Some business loans are protected. This means your company has provided collateral that lenders can seize if they don’t repay what you borrow. Collateral is usually a tangible asset such as equipment and inventory. A loan agreement may also state the assets used for collateral and may require a general lien on all business assets.

In some cases, you may need to sign a personal guarantee to get a business loan. If so, the business loan agreement expressly states that you have made this guarantee. Personal guarantees allow lenders to pursue your personal assets if their business is unable to do what they borrow.

contract

The lender may have certain provisions around the loan. The contract section lays out them. Common contracts include using the proceeds from a loan in a specific way, not taking on more liabilities until the loan is repaid, and keeping tax and business insurance coverage up to date.

Defaults

This section explains two important things: When a lender considers you to break the loan agreement and what happens at that point.

Many lenders have a period of bounty with late payments, but when they pass that period, they are considered to be the default.

The default section of a business loan agreement often includes an acceleration clause. According to the clause, once defaults are reached, lenders can accelerate their repayments and request full repayments. At that point, if you are unable to pay, the lender can grab what you have placed as collateral and sue you for the rest of your repayment.

Conditions you should know

To understand business loan agreements, you can use the terminology in this glossary, commonly used by lenders.

• Main. The principal represents the remaining loan balance, which decreases when you pay off what you borrow. With your loan agreement, the principal should be comparable to the money you earn from the lender.
• Annual Rate (APR). APR is the annual cost of a loan, including interest and fees.
• acceleration. If your loan agreement includes this clause, entering a default means that the lender can request that the full loan amount be repaid immediately.
• Amortization. This means paying off your loan in a planned installment. Usually, there is a flat monthly payment. Payments are initially directed towards the interest that exists, and the rest applies to the principal of the loan.
• Balloon payment. Some loans come with a massive lump payment that you will need to make at some point, usually later in your repayment schedule. Beware of these loans, as balloon payments can sneak up on you and leave the loan defaults to you if you can’t afford to pay.
• Blanket lien. This gives the lender the right to seize the loan as a repayment or as a repayment.
• Business partner. If someone else has given you a loan, the business loan agreement should list them as additional borrowers.
• Cross default rules. If you have one lender and multiple loans, then this is essentially the default for this particular loan, the lender states that you will consider you with the default for all your loans.
• Default. This means that you were unable to meet the loan agreement by not paying back what you borrowed on the agreed schedule.

What to do before signing a business loan agreement

Getting a business loan means working with many documents. After all the documents, you may be tempted to skim the loan agreement. Please do not. If so, you can find your business on hook at unexpected costs like balloon payments and fees.

Please check before signing:

• Please read the detailed print. You will be able to pass a loan agreement for each LANIS. Highlight or flag sections you don’t understand (indicates what you want to do in the next section).
• Make sure it lays out what you expect. Compare the loan agreement with what your lender advertises to you first. Make sure you have the same interest rates, fees and repayment schedules you expect.
• Answer your questions. Ask your lender about something on a business loan agreement that doesn’t make sense to you. The lender wants to close the loan (provides compensation). So you need to be happy to talk and answer your questions.
• Talk to a business lawyer. That said, you should not rely solely on lenders. Hiring a business lawyer to consider a loan agreement should not be a huge expense, and it will help you avoid leaving your company in a less favorable situation.
• Check the red flag. Ideally, I vetted my lender before applying for a loan, avoiding promises of guaranteed, guaranteed approvals or prepaid money. Still, you need to continue to evaluate your lender before you enter into a legally binding contract. Read their reviews and look for unexpected elements in your loan agreement. Additionally, you should not pressure your lender to sign a loan agreement, especially if you haven’t thoroughly reviewed the agreement before signing it.

Conclusion

If you think you’ve found the best small business loan possible, don’t sign it yet. Be sure to carefully review your business loan agreements and avoid committing your company to anything you don’t expect. Involving a corporate lawyer will help you fully understand the terms of the loan agreement.

Understand the important terms and definitions used throughout the loan agreement and ask your lender or business attorney to ensure you have a complete understanding of the loan before signing the dotted line.

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