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Business Loan Agreement: What to Know Before You Sign
October 21, 2021
Our Guide to Business Loan Agreements

Business Loan Agreement: What to Know Before You Sign

If you own or manage a small business, you’ll likely take out a loan at some point in time.

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

The lower interest rate you lock in, the more money you’ll save on the overall cost of your small business loan.

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.

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4 Steps to Take Before You Sign a Small Business Loan Agreement

If you’re busy or need fast funding, you may be tempted to sign a small business loan agreement without reading it. Since borrowing money is a serious commitment, no matter your size or industry, it’s important to read your business loan agreement carefully. Go through the loan agreement slowly, line by line so that you know exactly what will happen if you do commit to the loan. It’s a good idea to take these steps before you sign the agreement.

1. Determine the Borrower

Figure out if the loan will be in your name or your business name. If you borrow money under your own name, realize that you’ll be personally liable for the loan. Lenders require this information so that they know that the they have a set borrower to pay them back.

2. Understand Every Term and Condition

Make sure you understand the ins and outs of your business loan agreement. Once you read through it a few times, you should know what the lender considers as default so you can do your best to avoid it.

3. Agree to the Interest Rate

The interest rate is one of the most essential aspects of your loan because it will dictate how much money you spend on your loan in total. If the interest rate is higher than you’d like it to be, it may make sense to improve your credit score or see if you can land a lower rate elsewhere.

4. Ask Questions

If you’re confused about any information in your loan agreement, don’t be afraid to reach out to the lender and ask for clarity. The legal verbiage can be difficult to understand and lenders are used to answering questions about it.

Conclusion: Review Your Business Loan Agreement Closely 

Don’t overlook the importance of a business loan agreement. Since it determines the terms of your loan, it’s in your best interest to go through slowly and carefully.

Before you sign the document, ask other key players in your business to review it. They may come identify an issue in the contract or have a question you didn’t think of. If you read something that makes you feel uncomfortable, find another loan. There are many business loans out there and you’re bound to find a better option for your unique situation.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].