What To Know Before You Sign Your Business Loan Agreement

If you’re a new or aspiring business owner, each step in the process can feel daunting. There are dozens of documents to sign and projects to finish before you open! Learn what to know before you sign your business loan agreement, and read each document carefully to understand exactly what you’re signing.

What Is a Business Loan Agreement?

When you borrow a large amount of money, your lender will have a series of terms that define how that loan works. You’ll look at the amount you’re borrowing, the APR from year to year, and any security agreements laid out by your lender. The bank or credit union lending you the money wants to protect themselves in any eventuality, and the business loan agreement puts that in writing. Pay attention to how much new business start-up funding you have and ensure it’s enough to make your payments on time.

Elements of the Agreement

Many business loan agreements follow a similar structure and use similar verbiage. Keep an eye out for the following terms:

  • APR: The annual percentage rate dictates how much interest you’ll be paying from year to year. Ask your lender what kind of interest it is, whether fixed or variable.
  • Loan amount: This is the amount of money you’re borrowing. It will likely be less than the total cost, as you’ll be putting some money down to start. Set your budget by how much you can reasonably pay on time.
  • Default: Defaulting on a loan simply means not paying it back. Many lenders won’t bat an eye at a late payment or two, but others take missed payments more seriously. Ask your lender how they define the word “default.”
  • Penalty fees: This definition also varies from lender to lender. Most will charge you penalty fees for being late on your payments. Some lenders also charge prepayment penalties to make up for interest lost when you pay off your debt early.

Steps To Take Before Signing

Who will be the borrower on your loan? Determine whether to put in your own name or the name of your business. If you take out the loan in your own name, you will be personally responsible for the whole loan.

Read each section of the agreement, line by line. It may take you a while, and you may ask a lot of questions, but it’s better to have too much information than too little.

Before you sign your name to a business loan agreement, make sure you understand every element of that agreement. Verbiage and terminology vary from lender to lender! Keep these things to know before you sign your business loan agreement at the forefront of your mind, and don’t be afraid to ask questions.