Business Loan Agreement - Lender And Borrower

Oleh Googelio

September 20, 2013

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Business Loan Agrement - Lender And Borrower. The Loan Agreement list the terms under which a loan is given. The bank is a lender, and any borrowing entitiy is a borrower.

One well known way for a business to raise money is a business loan. If you do well, banks, unlike equity investors, still only get the interest instead of a profit percentage or company share. Keep in mind, however, that you must pay a loan back regardless of your company’s success. 

The loan agreement covers many of the same terms and conditions as a promissory note, although it is longer and more complicated. According to All Business website, “Virtually all the terms in a loan agreement are negotiable; there is no such thing as a ‘standard loan.’ 

The agreement lists the amount of the loan, when the money will be received, if the money is going to be parceled in specific amounts on multiple dates, the repayment schedule, interest and all other conditions, terms and warranties that the lender requires from the borrower.

Repayment schedules are very precise and list exact payment dates and minimum expected amounts. Some include a voluntary prepayment clause allowing the borrower to pay the loan off before its due date under specific circumstances. The agreement must specify the interest rate, calculation process and repayment process. If your loan has a grace period, that should be stipulated as well. 

Finally, you will find the consequences and penalties in case of a payment default by the borrower.

Banks usually require security to back your loan. The agreement must contain all the details of debentures--unsecured loan certificates that your company issues--as well as guarantees or charges given as loan security. 

Collateral involves the pledge of a specific asset in a mortgage for real property or security agreement for personal property. Any co-signer or guarantors and their liability should be in the agreement as well.

About Covenants

With a business loan, the bank may add a list of covenants or conditions that the borrower must comply with to keep the loan in good standing. If you do not comply with the covenants, the loan is in default and the bank can require payment in full. 

The covenants include proof of hazard insurance, life insurance for the owner with the bank listed as the beneficiary, up-to-date taxes, fees and licenses. In addition, covenants can prevent the owner from doing things, such as changing management or incurring additional debt without approval.

Any additional fees will be included in the agreement with explanations and amounts. Some banks include up-front loan or processing fees. Lenders often require a clause stating that if you fail to make your payments, you’ll be required to reimburse the lender’s fees or costs to enforce or collect on the debt. It is your job to read the fine print and make sure the fees are reasonable.

(Article source :  Dana Griffin, Demand Media- smallbusiness.chron.com )

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