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Tata Capital > Blog > Top Things to Know About an SME Loan Agreement

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Top Things to Know About an SME Loan Agreement

Top Things to Know About an SME Loan Agreement

An SME loan agreement or business loan agreement is a document that states the details of a loan acquired for business purposes. It is a contract between the lender and the borrower that contains the various clauses of the loan. The agreement contains a lot of legal jargon that can be difficult to understand, which is why it is advisable to consult a lawyer before signing one. However, if you do not wish to hire a professional,

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Here are some terms that can help you understand the agreement.

Fixed or Variable Interest Rate 

The interest rate for business loans can either be fixed or variable. If you choose a fixed rate of interest, you are required to pay a pre-decided amount irrespective of the market’s fluctuations. On the other hand, if you choose a variable rate of interest, the interest on the loan can change frequently based on the market conditions. Sometimes, people do not understand the difference between the two and end up signing the agreement without the knowledge of how it impacts them. Ensure you assess your situation and choose the type of loan that suits you the best.

Prepayment 

Prepayment for Business Loan

The rules of prepayment differ for each loan provider. While some charge no fees if you decide to repay the loan in a lump sum, others may ask for a pre-closure fee. Picking a loan with no prepayment fees is ideal. However, even if you choose one with a penalty, you should understand how it can affect you as opposed to regular EMIs. You can use a business loan EMI calculator and compare it with pre-closure fees to make a better decision.

Security Cover

When you apply for a business loan, you also need to sign security against the loan. This could be in the form of assets or personal guarantee. Sometimes, the lender can also ask for additional security if the value of your assets fall with market conditions. It is advisable to use a stable form of security that is less likely to fall with market downturns. You can also opt for an unsecured loan; however, that may result in higher interest rates. 

Penalty Charges

If you are unable to settle your MSME loan, the lender is likely to charge you some penalty. Every loan provider has a criterion that determines the penalty fee in case of a payment default. The amount is usually mentioned in the loan agreement. Make sure you check this and understand its implications well. 

Final words

A business loan can substantially help you in setting up your business, running smooth operations, and ensuring its progress. However, it is vital to understand each and every clause of the loan agreement before you sign it. The ultimate goal of a loan is to help you in the long run, so make sure to include clauses that do not affect your financial standing, rather, make the loan process simple and straightforward. 

If you need an SME loan, you can check out Tata Capital business loans starting at an interest rate of 19%.

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