What Is a Business Loan Agreement?

A business loan agreement is simply a contract between a borrower and lender. It spells out all of the terms and conditions of a loan. They are typically used for business loans. These loans tend to be larger. There are usually more issues to address than the average consumer loan.
Since this document is legally binding and enforceable, borrowers need to be aware of its contents. Many of the conditions and stipulations are also negotiable. Therefore, it is important for borrowers to carefully review the agreement before finalizing the loan. Here are some of the key items included in these agreements along with a description of each.

DUE DATE

This part of the agreement gives the date the loan must be paid in full. The date can be at the conclusion of a series of periodic payments or it could also include a provision for a balloon payment on a specific date. If a balloon payment will be due, the details are spelled out here. In some cases on the due date the borrower is eligible to renew the loan. The conditions and requirements for renewal are given.

INTEREST PAYMENTS

The lender’s rate and amount of interest payments are listed in this part of the contract. The rate can be fixed or adjustable. When the rate is an adjustable, the date the rate will change is included .If the interest rate is tied to an index, the method of computation will be detailed in the paperwork.

LOAN FEES

Loan fees can include up front and processing. These fees can be substantial on large loans. Be sure to review  these fees in order to determine the true cost of the loan. The amount of these fees are identified and itemized in this section of the documents.

PREPAYMENT

Many loans do not give borrowers the flexibility of paying off their loan at any time without penalty. Loans with this provision charge a penalty for early payment. The prepayment clause defines what constitutes an early payment and gives the amount of the penalty. If there is no prepayment penalty, it is stated in this section.

DEFAULTS

Failure to make payments is usually not the only reason for default. Most lenders list a variety of causes for default. Generally a breach of any of the obligations in the document is considered a default. If is important for borrowers to note the method and length of advance notice that is required by the loan agreement.

COLLATERAL

A description of the property that is pledged as security for the loan is contained in the collateral section. If a first or second mortgage is required the property’s location will be identified. Any agreements for partial release of collateral will be included in this part of the agreement.

SUMMARY

Loan agreements are typically very detailed documents. You should carefully review the entire document and make sure all provisions are reasonable. More importantly, avoid the possibility of a future unwelcome surprise.

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