When you are approved for a small business bank loan, you will be requested to sign numerous papers, including a loan agreement and certain personal guarantees.
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Understanding the Documents Required for a Business Bank Loan
When you are approved for a small business bank loan, you will normally be requested to sign a loan agreement, a promissory note, and some type of personal guarantee.
Though most individuals just give this documents a quick scan, it is critical to understand the terms and conditions you are agreeing to when you sign these pages.
Each paper is described below, along with a few pertinent items to consider:
The Loan Contract
A loan agreement is a document that contains the terms of a small company loan. It contains information regarding the loan’s terms as well as the borrower’s representations, warranties, and covenants.
“Representations and warranties” are legal terms that relate to your commitment to the bank that you have met specific requirements before to getting any funding, and “warranties” refer to promises you make as the borrower about what you will do throughout the loan’s duration. The bank will also ask you to declare, generally by affidavit, that you have proper authorization—that is, that you are authorised to commit your company to the loan conditions.
Promissory Note
A promissory note specifies the parameters of the loan repayment, such as the principle and interest rate, the duration of the loan, late penalties, and whether or not there is a prepayment penalty. It also specifies the conditions that would cause the bank to declare your loan in default, as well as what would happen if a default occurred.
A loan default happens when a borrower fails to make due payments or fails to comply with the conditions of a loan in some other manner. In the case of a default, the loan may become instantly due and payable, the borrower’s credit rating may suffer, and the debt may be handed over to a collection agency. Simply being aware of the requirements and circumstances around a default may go a long way toward safeguarding your credit rating and personal assets.
Look for the cure language in the default section, which gives you a specific amount of time, generally one to two weeks, to make changes once the bank notifies you of the default.
Interest in Security
A security interest will be mentioned in the documents if the funding your small company obtains from the bank is backed by collateral. This section describes a lender’s interest in the specific property that is being utilised to secure the business loan against the potential of default.
You will be required to sign a standardised document known as a UCC-1, which sets a lien on the property and prevents you from disposing of it until the debt is paid off.
The majority of banks will want a security interest in your company’s inventory, accounts receivable, and other physical assets. Be aware that banks often have an interest in the equipment or inventory you will purchase for your small company after you have gotten financing. Whenever feasible, attempt to limit the bank’s interest in your existing assets so that you don’t jeopardise your company’s capacity to acquire equipment or inventory finance in the future.
Guarantee and Surety Contract
Because most small firms lack sufficient assets or operational experience for a bank to risk a loan, particularly in the beginning, banks will often need a personal guarantee from the business’s proprietors. A personal guarantee is essentially your commitment to the bank that if your small company fails on the loan, you will repay the financing using your personal assets, such as the equity in your house.
Even if your small company is a distinct legal entity, such as a corporation or LLC, the bank may want a personal guarantee.