A business loan agreement is a contract drawn between a business in need of funds and a lender. It is a complex document, often difficult to read and understand, especially for the uninitiated. Crucial to the working of the agreement are the many clauses listed in the document. These are put in place to protect the interest of the lender and are typically negotiable. When you apply for a business loan, discuss such clauses with the financial representative to save yourself from confusions in the future. Here are the important clauses present in a business loan agreement you should know about.
Interest Rate Fluctuation Clause
There are two types of interest rates that a lender might impose on your loan agreement – fixed and variable. A fixed interest rate agreement would require you to pay a fixed amount of interest, regardless of prevailing market conditions. A variable interest agreement, on the other hand, requires you to pay interest based on a rate that varies according to market conditions. Based on the market conditions of the time, be careful to negotiate an interest rate type that suits you.
Default is generally defined as the non-repayment of a loan to a bank. However, it is important to get the exact definition of default with your bank, as it may differ with every financial institution. A default can also be declared in case of the borrower’s death or involvement in a criminal or civil case.
Security Cover Clause
This clause specifies what assets or personal guarantee the borrower will provide against the loan withdrawn. The property to be purchased by the business is most often the security provided. Additional security can be demanded by the bank if the value of the current security falls due to market fluctuation. While it is often better for the borrower to not give security, unsecured loans tend to have a higher interest rate.
This is the most important clause of the loan agreement and determines the time period of the loan. There are two types of repayment clauses – repayable on demand and fixed-term. In the former, you will have to keep a sum of money for repayment at all times, as it may be demanded at any time by the bank. This makes business expenditure planning very difficult. Hence, it is preferable for you to choose a fixed-term repayment clause.
Capital is the most important factor in the success of any business, and so you must ensure that your business loans are from the most reliable lenders. Tata Capital offers loans for business at extremely competitive interest rates (starting from 19% p.a.), with no security required and a structured EMI plan. Each loan is designed keeping in mind the unique needs of your business. With flexible policies and interest rates, it is only the smartest choice to get your business loan from Tata Capital.