October 21, 2021
Business Loan Agreement: What to Know Before You Sign
After you apply for financing, get approved, and decide to accept the loan offer, you’ll receive a business loan agreement. At its core, a business loan agreement is a document that outlines the terms and conditions of your loan.
In this blog post, we'll explain how business loan agreements work, what you can expect, and what to consider prior to signing on the dotted line.
Business Loan Agreement Definition
A business loan agreement clearly defines how a loan will work. Whether you pursue a small business loan from a bank, credit union, or an online or alternative lender, you will receive this document. Even though every lender’s loan agreement is different, most of them follow a similar structure and include the same type of information. Your lender will require you to sign the document before supplying you with your loan amount.What to Expect From a Business Loan Agreement
Some small business loan agreements are lengthier and more comprehensive than others. Most of them, however, include the following components.Promissory Note
A promissory note states the amount of money you agree to borrow plus the interest rate and repayment schedule. You can think of a promissory note as a promise to pay off the loan.Interest Rate
The interest rate refers to the cost of borrowing money. Typically, these factors can affect your interest rate:- Credit score
- Business loan type
- Whether you offer collateral
Security Agreement
If you agree to submit collateral to secure your loan, a loan agreement will feature a security agreement. This document will describe your commercial property, equipment, inventory, or other collateral that the lender will seize if you, the borrower, defaults on your loan payments.“If This, Then That” Statements
Since anything can happen to your small business, a business loan agreement will likely include “if this, then that” statements. These are situations you may find yourself in and what will happen with your loan when you’re in them. Small business loan agreements will always have fine print, which buries some of the most difficult aspects of the loan. If you take a close look at your loan agreement, you may find that you need to sign a personal guarantee. A personal guarantee states that if your business lacks enough assets to secure the loan and you don’t pay it back on time and in-full, the lender will have the right to seize your personal assets. In addition to signing a personal guarantee, the fine print may include a prepayment penalty, which is a fee you’ll be required to pay if you repay your loan early or a late payment penalty you’ll face if you make your payments late. To avoid unwanted financial surprises, be sure to read the fine print very carefully. Often, business owners make the mistake of quickly skimming their loan agreement and therefore miss out on important contingencies that affect business's finances.