Important Things to Know About Business Loan Agreements

A business loan agreement is a crucial document that contains every minute detail regarding the loan you are borrowing. From loan tenure to interest rate, you can find every loan-related information on this agreement. You will receive a loan agreement from the lender while applying for a business loan. Once you sign the agreement, you need to follow the clause as set by your lending institution. 

So, you must read out the agreement carefully before signing it. This will help you stay aware of the clauses and stay prepared accordingly. Continue reading to know the important factors that you must consider while signing a business loan agreement.

Top 7 Things to Consider Before Getting into a Business Loan Agreement

Check out the following things before signing your business loan agreement: 

1. Annual Percentage Rate (APR)

Every business loan agreement mandatorily contains an APR or Annual Percentage Rate. It is the broader measure of the total cost of your loan – it reflects not only the interest rate but also the fees that you have to pay to get the loan.

Thus, APR is one of the significant parts of a business loan agreement and any minor difference in it can cause huge differences in total cost. It includes the interest rates and fees applicable for a business loan. 

2. Loan Amount

Before signing the loan agreement you must check the sanctioned loan amount. It may happen that you have agreed upon borrowing a certain amount but the lender altered the document and offered you ahigher/lower loan amount. It will drain your money and yield profit to the lender. Though the chances are low, you should stay cautious regarding the loan amount. Thus, checking the loan amount while signing your loan agreement is a must.

3. Repayment Clause

The repayment clause states your loan tenure. Thus, it is a crucial part of your loan agreement. 

Generally, there are two types of repayment clauses: fixed term and repayable on demand. For a fixed repayment term, you get a fixed period to repay your loan in monthly or quarterly instalments. 

However, for repayable on demand, you need to keep aside the repayment amount and pay when your lender asks for it. However, most borrowers prefer fixed terms considering the straightforwardness of the repayment procedure. On the other hand, repayable on demand may cause hindrances in the business flow.

4. Prepayment Penalty

You may have to pay a penalty if you opt for advance loan repayment before the end of a tenure. Maximum lenders impose a penalty on loan prepayment. Thus, you should check the loan terms carefully before applying for a business loan. Otherwise, you may burden yourself if you plan to repay the loan in advance. 

5. Interest Rate Type

Another crucial factor that you must know before signing the loan agreement is the type of interest rate. Lenders impose two types of interest rates on business loans: fixed and floating. In the case of a fixed interest rate, you can determine your payable amount beforehand as you need to pay a fixed interest amount. 

However, if you borrow loans against floating interest rates, your repayment amount will vary as per market fluctuations. You might need to pay a higher interest rate and vice versa if the situation arises. Thus, you must stay aware of the type of interest rate imposed on your business loan amount. 

6. Penalty Charges

Every borrower needs to pay a penalty upon missing the EMI due date. However, the penalty-related rules and regulations vary from one lender to the other. So, while applying for a business loan, you must ask your lender about the penalty charges and clauses to stay prepared. 

You may run out of cash at any point during the loan tenure and need to pay a hefty penalty for that. Thus, knowing the penalty clause beforehand will help you arrange the finances accordingly. 

7. Security Cover 

The security cover clause determines the assets you can pledge to borrow a business loan. You may pledge the asset you are buying with the loan amount as collateral. However, the lender may ask for an additional asset as security depending on the loan amount. So, you should know the bank’s clause regarding collateralised assets before applying for a business loan. 

You can also avail an unsecured loan without going through the hazards of pledging collateral. However, these loans charge a higher interest rate compared to the secured ones. So, you should check every clause carefully before proceeding with the loan agreement. 

Final Word

As a businessman, you may need to borrow loans to fund your business from time to time. However, make sure you choose a reliable lender for your business funding to avoid excessive financial burden. Reading the loan agreement thoroughly and checking the mentioned factors will help you in choosing the right lender. 

Frequently Asked Questions