What Is a Business Loan Agreement?

Terms of Repayment

A business loan agreement clearly specifies all the terms of repayment of the loan, including the rates of interest on the money borrowed, the monthly dates assigned and the minimum amount that the borrower is required to pay each month. The minimum amount payable is called the EMI (equated monthly installments) and is computed according to the duration of the loan. Also, the loan agreement must specify the prepayment and non-payment clauses. The pre-payment clause explains to the borrower his choices in the event he wants to repay the loan before the end of the stipulated period. The non-payment clause explains the recourse(s) that the lender has if the borrower defaults on the repayment schedule. The penalties that would be levied are also clearly explained.

The lender needs a guarantee from the borrower that the loan will be repaid in full. For that, the lender asks the borrower to provide collateral from its assets and the guarantees of some individuals. The lender has the right to the assets pledged. In case the borrower fails to repay the loan, the lender can legally acquire those assets. Moreover, the guarantors (also known as the co-signers) provide the lender with reassurance that in case the borrower defaults, they will repay the money.

The lender may also require the borrower to comply with some additional requirements. In case the borrower does not meet with these requirements, the lender has the right to revoke the loan and ask for full repayment in a lump sum. The lender may ask the borrower to additionally take out a life insurance policy on the owner(s) of the business. Otherwise, the lender may want all of the due amounts on the asset to be fully repaid before the loan is sanctioned. The company is also required to provide depreciation on the asset until the current date. The lender may also add a clause specifying that the company must not restructure itself during the tenure of the loan, or the company must not pile on further debt.

The lender needs to have information on how the loan monies will be utilized. The borrower is required to provide details on this aspect as well as the company's financial statements. The financial statements include the company's balance sheet, income statement and cash flows statement. With this, the lender is able to assess whether the borrower will be able to repay the money in full and within the time frame specified. The borrower also needs to pay the processing costs for the loan.