Understanding Business Bank Loan Documents
Upon approval for a small business bank loan, you will typically be asked to sign several documents, including a loan agreement and some personal guarantee.3 min read
Understanding the Documents You Need to Sign for a Business Bank Loan
Upon approval for a small business bank loan, you will typically be asked to sign several documents, including a loan agreement, a promissory note and some kind of personal guarantee.
Though most people do not give more than a cursory glance at this documentation, it is important to understand the terms and conditions you are agreeing to when you sign these pages.
Below is a description of each document as well as a few relevant points of consideration:
The Loan Agreement
A loan agreement is a document setting forth the details of the small business loan. It includes information about the terms of the loan as well as the representations, warranties, and covenants of the borrower.
"Representations and warranties" is legal terminology that serves as your promise to the bank that you have complied with certain conditions prior to receiving any financing, whereas "warranties" refers to promises you as the borrower are making regarding what you will do during the term of the loan. The bank will also require you to affirm, usually by affidavit, that you have due authorization- i.e. you are authorized to bind your business to the terms of the loan.
The Promissory Note
A promissory note details the terms of the loan repayment, including the principal and interest, the length of the loan, late fees, and whether there is a prepayment charge. It also describes the circumstances under which the bank would declare your loan in default, as well as what happen should a default occur.
A default on a loan either occurs when the borrower does not make the required payments or does not comply with the terms of a loan in some other way. In the event of a default the loan may become immediately due and payable, it may be turned over to a collection agency, and the borrower's credit rating can be negatively affected. You can go a long way towards protecting your credit rating and personal assets simply by being aware from the start what qualifications and conditions surround a default.