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Business Loan Agreement – An Overview

Business Loan Agreement – An Overview

A business loan agreement is an agreement between the lender and the business. It is basically a document stating out the entire details of the loan agreement and it is of vital importance throughout the tenure of the business loan. So it is essential that before signing in the agreement, you must check and be clear with each and every clause and terms involved in the agreement. Any shortfall in this step and you might land in trouble later.

In case, you are not clear about the exact terms and clauses, you should go to an appropriate lawyer and ask them to help you clarify about your business loan agreement.

The business loan agreement is a business contract, so all parts are necessary for the contract to be valid, that is, for it to be enforceable in court, if necessary.

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  • Why Create a Business Loan Agreement

The most common reasons for seeking a business loan agreement usually are –

  1. Business startup
  2. Buying a building or new premise
  3. Buying equipment, machinery or vehicles
  4. Buying products or parts to build an inventory.

Fundamentals of Business Loan Agreement

  • Loan Amount

Make sure to confirm that the correct loan amount is mentioned in the agreement that you are signing. There has been instances where unclear amount was changed on documents as per the lenders convenience. Though rare, one should be aware of these things and should read the agreement properly before signing it.

  • Annual Percentage Rate (APR)

The APR measures how much percentage your lender will charge you for the loan every year. The sum you’ll be repaying in total also includes the interest rate & fees charged. So you should carefully calculate and go through the rates provided as even a small difference in your business loan APR could end up costing you more.

  • Prepayment Penalty

Usually, the lenders charge some prepayment penalty when you repay the loan before the time period mentioned in the loan agreement. Knowing the penalty charges becomes important. For e.g. you have saved some money and think of prepaying your loan, and when you go to prepay, you get to know that you have to pay much more as prepayment charges, then it is better to avoid. So consider this too before you sign your business loan agreement.

  • Penalty Charges

If there has been any default in paying the EMI, penalty charges are levied which you need to pay on top of your EMI. It varies from lender to lender and certain specific criteria is to be followed. Under any unexpected situations arising, you should be aware of exactly how much you will be paying towards penalty fee in case of default.

  • Type of Interest Rate

The type of interest you pay for your business loan is entirely your choice. It can be either fixed or floating and it should be mentioned in the business loan agreement. In case of any doubt, don’t hesitate to talk to your lender in depth about it.

  • Responsibilities of the Loan Guarantor

Responsibilities of the guarantor depends on the lender and it is important to know of this beforehand. In case of any defaults of EMI payments, the guarantor is held responsible for the payments and lenders can also sell the collateral which is given against the loan. It is important to know the responsibilities of the guarantor before you sign your loan agreement.


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