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A business loan is a type of financing one can avail to fulfill the need of funds for their business. While taking out a business loan, it is crucial for you to know about the various elements and clauses of a business loan agreement.
This agreement is a legal document that is signed by both the borrower and the lender. The business loan agreement protects two promises by law – the promise by the lender to provide a certain sum of money, and the promise by the borrower to repay the same.
Read – 10 Things to Do Before You Obtain a Long Term Business Loan
Also, the loan agreement fulfills all the criteria of a business contract and is drafted in a way to ensure that it remains valid for a certain period of time. In addition, the business loan agreement is valid in the court of law.
Important Elements in a Business Loan Agreement
Every business is unique and operates in its own unique environment. Therefore, different business loans and their respective agreements widely differ from each other.
In every business loan agreement, everything is negotiable, and therefore changeable. You are also advised to read through the fine print cautiously and understand each and every term before you sign the agreement.
Here are some of the significant components of a business loan agreement:
#1. Effective date
It is the date when the business loan agreement is signed upon by both parties. Usually, it is also the date when funds are made available.
#2. The parties involved and their relationship
The borrower and the lender of the loan agreement are specified and identified. Their relationship is also described.
#3. Security
The security of the agreement specifies and describes the collateral on which the loan is secured. Such collateral maybe lands, building, plants, vehicles, etc.
#4. Terms and conditions
The terms and conditions are the most crucial section of the entire business loan agreement. It includes:
- The loan amount
- The period of time for which the loan is taken (this is usually calculated in months)
- The interest rate which may be floating or fixed
- The repayment schedule
- A provision for the early repayment of the business loan
- Penalties on non-payment of an installment, whether of principal or interest beyond grace period if any.
#5. Governing law
The business loan agreement may be subject to national law or state law, in which case all of the states may have a different law in force. The loan agreement must specify which law is applicable here. It must also specify which court will have jurisdiction in case of any disputes.
#6. Borrower’s representations
The borrower legally confirms that certain statements and assurance given by him/her are true and to the best of his/her knowledge. It also includes the affirmations about his/her ability to pay back business loans in the future, the going concern capacity of the business, etc.
#7. Covenants
These are promises made by both the lender and the borrower. They may include:
- Proof of insurance taken out on security put up as collateral
- Proof of life insurance of the business owner
- Agreement to pay expenses the lender may incur if the loan has to proceed through collections
- Guarantee that no additional loans will be taken before full repayment of this loan
- Guarantee that the management of the business will remain unchanged
- A condition that the borrower will provide periodic financial statements to the lender
A business loan agreement is a complex bet. It is always better check your eligibility using a business loan eligibility calculator or consult an attorney in order to understand the terms and conditions involved before signing on the dotted line.
The loan agreement explains what a lender expects of you once you commit to taking out a business loan. Thoroughly review the document before you sign it so you understand what you’re getting yourself into.
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