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Tata Capital > Blog > Essential Elements of a Business Loan Agreement

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Essential Elements of a Business Loan Agreement

Essential Elements of a Business Loan Agreement

If you are thinking of taking out a business loan, it is crucial for you to know about the various elements and clauses of a business loan agreement. The business loan agreement is a legal document which is signed by both the borrower and the lender. In essence, this agreement protects two promises by law – the promise by the lender (for example Tata Capital) to provide a certain sum of money, and the promise by the borrower (for example the business) to repay a certain sum of money. Not just that, the loan agreement fulfills all the criteria of a business contract and so it is drafted in such a way as to ensure that it remains valid for a certain period of time. In addition, the business loan agreement is enforceable in a court of law.

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Important elements in a business loan agreement

Every business is unique and operates in a unique environment. Therefore, different business loans and their respective agreements widely differ from each other. This is true no matter if the lender is a bank or a private party. In every business loan agreement, everything is negotiable, and therefore changeable. You are advised to read through the fine print carefully and understand each and every term before you sign. Here are some of the significant components of a business loan agreement:

1. Effective date

This is the date that the agreement is signed upon by both parties. Usually, it is also the date when funds are made available to you.

2. The parties involved and their relationship

The borrower and lender are specified and identified. Their relationship is also described

3. Security

This specifies and describes the collateral on which the loan is secured. Such collateral may be land, building, plant, vehicle, etc.

4. Terms and conditions

This is perhaps the most crucial section of the entire business loan agreement. It includes:

  • The loan amount
  • The period of time for which the loan is taken (this is usually calculated in months)
  • The interest rate which may be floating or fixed
  • The repayment schedule
  • A provison for the early repayment of loan
  • Penalties on non-payment of an installment, whether of principal or interest beyond grace period if any. This is commonly known as the Defaults and Acceleration clause

5. Governing law

The business loan agreement may be subject to a countrywide law or a state law, in which case each state may have a different law in force. The business loan agreement must specify which law is applicable here. It must also specify which court will have jurisdiction in case of any dispute

6. Borrower’s representations

The borrower legally confirms that certain statements and assurance he has given are true to the best of his knowledge. These include affirmations about his ability to pay back business loans in the future, the going concern capacity of the business, etc.

7. Covenants

These are promises made by both the lender and the borrower. They may include:

  • Proof of insurance taken out on security put up as collateral
  • Proof of life insurance of the business owner
  • Agreement to pay expenses the lender may incur if the loan has to proceed through collections
  • Guarantee that no additional loans will be taken before full repayment of this loan
  • Guarantee that the management of the business will remain unchanged
  • A condition that the borrower will provide periodic financial statements to the lender

A business loan agreement, no matter the amount involved is always a complex beast. It is always better to consult an attorney in order to understand the terms and conditions involved before signing on the dotted line. Each clause, even an acronym has specific implications for which merely having a general idea will not suffice.

Various lenders such as Tata Capital offer unsecured business loans to small businesses that come with easy EMI options. One has to simply use an online small business loan EMI calculator that will give the accurate amount that needs to be paid every month as loan repayment.

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