Business loans or external funding by the alternative and traditional lender is generally considered as one of the ideal ways to generate extra capital and to increase the cash flow. Whenever a borrower applies for a business loan, he or she has to scribble a signature on the business loan agreement document. In technical terms, a business loan agreement is an official document that contains all the necessary information along with the tiny detail regarding the debt. Make sure you are familiar with every term related to the dent and aware of potential scams and baits. It is recommended to have a lending expert or a lawyer to keep you from signing the agreement that will not be comfortable within the long term. But if this is not the case, then keep reading as we will go over the fundamentals one by one.
CORE ELEMENTS OF THE BUSINESS LOAN AGREEMENT
Whether you are applying for a business loan for the first time or you are an often borrower, you have to take notice of the basics of the loan agreement before reaching the conclusion. Go over the following core elements before you call for the celebration.
- Loan Amount
The first step is to review the loan amount on the final document, make sure it is the same amount you agreed upon. In some cases, the lender agrees to offer the loan amount that the lender demands but later they reduce the amount in the official documents, giving preference to their convenience. If this is the case, then you must discuss the situation with your potential lender take the necessary steps.
- Annual Percentage Rate
Next, to the loan amount, the annual percentage rate is the next most important element in the loan agreement. An APR shows the total cost of the loan for every year – the total sum you have to pay in the coming year. Annual Percentage Rate includes the additional fees and interest rates, even a minimal increase in the APR can make you pay more than you agreed upon.
In addition to this, instead of paying attention to the loan amount you have to make sure that you
- Repayment Term
The next on the list is the repayment term of a small business loan. The repayment term can help you determine the total cost of your business loan keeping the monthly, daily, or weekly terms in mind.
- Prepayment Penalty
Some traditional and alternative lenders ask for the prepayment penalty if the borrower makes early payments. To eliminate the element of surprise know whether your loan comes with a prepayment penalty or not.
If your deal does not include any prepayment penalty clause ask your potential lender anyway. If there is a prepayment clause in your deal, then the next thing you should be asking is how much fine you have to pay. Keep this factor in mind to save your money.
- Penalty Charges
Borrowers who fail to make Equated Monthly Installments need to deal with penalty charges. The criteria for penalty charges vary from lender to lender. If you are certain that you won’t be having enough money to pay the lender on time, then you must be familiar with the total amount you are supposed to pay to the lender. Gather your potential sources for money to pay the lender on time.
- Type of Interest rate
Ask your lender about the type of interest rate that you will be paying either it is fixed or variable. You can even find the details on the type of interest rate in your business loan agreement document. Let say, you think the interest rate was fixed, but now it is changing with every payment. So be wary of this factor.
- Payment Schedule
If you are standing on a stellar financial position, then a lender allows the borrower to choose among weekly, monthly, or yearly payments. Check the agreement to see if both lender and borrower are on the same page regarding the payment schedule.
- Default on the payment – collateral or no collateral
Ask your lender about what will happen if you default on your payments. Some lenders are okay if you miss a payment or two, others, on the other hand, would charge you, even if you are a day late. So check all the terms and conditions that fall under the ‘default’ and navigate your business loan accordingly. If the borrower has considered action as default then you can’t officially take an action against it because you have signed the document.
- Loan cost
Lastly, you have to triple or quadruple check the total loan cost. This also involves the loan term, interest rate, and the loan amount of the targeted business loan.
Remember to scan through the list of the fundamentals before saying ‘yes’ to the final business loan deal.
BUSINESS LOAN AGREEMENT LINGO
While you are going over the business loan agreement, you might come across technical jargon related to business financing and lending. If you see a term, you are unfamiliar with, highlight it and search afterward. As we are here to help, we have compiled a list of some of the most used terms.
Automated Clearing House (ACH) is one of the most used electronic fund transfer system that is used to support payments in the entire United States of America. ACH payments are electronic payments that give direct authorization to the institution or the customer to debit form the business checking account of the customer.
Loan amortization depicts the way all the repayments are restructured. Mostly, the borrower has to make the monthly payments. In simpler terms, it means that you have to make all the payments with the same amount each month.
The annual rate that is charged by the lenders when they apply for a business loan. It is represented by a percentage sign.
When a borrower pays off the entire debt in the huge amount at the end of the debt it is called the Balloon Payment.
This means that the lender has a right to take control of all the borrower’s assets if the borrower does not make timely payments.
Co-signer is someone who takes responsibility for the repayments of your small business loans, in case of your absence.
When a borrower has to pay extra than the pre-planned loan amount, this is called as curtailment. There are further two types of Curtailment: Full and partial.
If the lender says not to default on the loan, it means to refrain from missing the scheduled payments. If the borrower misses the payment, the lender will take legal action against the borrower.
Deferred Payment Loan
This type of payment loan allows the lender to schedule the payment in the future rather than making an immediate payment.
If you apply for a cash advance, you must know about Merchant Cash Advance. The factor rate is usually mentioned in the form of the decimals.
Interest-Only Payment Loan
An alternative to the traditional loan, interest-only payment loan allows the borrower to pay the final amount at the ends of the loan.
Also known as the Loan-to-Value ratio, shows the exact value of the person or business-related asset that will pay the price of the loan. If you looking for equipment financing or commercial financing, then the LTV ratio will tell you how much owe to the lender.
If a borrower wishes to determine whether he or she will qualify for a business loan, go through the loan underwriting process.
Even if the borrower makes an early payment, he or she still has to pay the pending interest rate. When you borrower offers you a loan, the lender adjusts the plan as per the said amount. So limit the surprises, the business owners charge for the prepayment penalty.
The total amount you borrowed as a business loan is called as the principal amount. Let say, you get a business loan for $50,000, in this case, the principal amount is $50,000.
When a borrower pays off the first business loan by getting funds from a second business loan it called refinancing a small business loan.
The day to day managing of a business loan is called the loan servicing. Keeping an update regarding the future repayments, maintenance and collection of funds comes under loan servicing.
BE AWARE OF THESE RED FLAGS
If you are going over your business loan agreement, and your gut tells that something is wrong, then it is time to rethink and reconsider. Watch out for the following warning signs:
- The lender is asking for money before the final deal.
If the lender asks you to pay the money upfront, it is your cue to change your lender. Regardless of the rationale behind requesting upfront money, this is a sign of illegitimate and dodgy lenders.
- The deal is too good to be true
Let us say with a credit score of 600, poor credit history, and ill-documented business tax return documents a lender is offering you a stellar business loan deal – a loan amount of more than $50,000, low-interest rate, and flexible repayments, then the business loan agreement needs serious revision.
- Watch out for any pressure!
If you feel like you can’t say no to the deal made by your lender, don’t you think there is something wrong with the lender.
As you are the one getting a business loan, you must be the one holding the wheel. Stay away if the -lender is trying out pressure sales tactics on you.
- Saying ‘yes’ without reviewing your application.
Refrain from signing business loan deals with the lender who are approving your business loan application without analyzing and assessing your creditworthiness. No legit lending company offers business loans without making a financial judgment of the borrower.
THE BOTTOM LINE
With a detailed guide, you have everything there is to know about a business loan agreement. Whenever you are making an important financial decision, consult a lending expert.
Merchant Advisors offers transparent and flexible business loans to small businesses. For more tips and guides on a business loan, follow us on Facebook and Twitter (@Onlinecheck). If you have any question, call us on our toll-free number at (833) 827-4412; our financial advisors will help you every step of the way.