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Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance.
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Emily Maracle is a small business loans editor for Bankrate.com. She is passionate about creating high-quality content to help educate and make complex topics accessible to all readers.
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Taking out a business loan means taking on a burden for your business. Yes, it gives you the cash in hand that you need now. But it also gives you a responsibility to repay what you borrowed, usually plus interest and fees. As a result, it’s important to know what you’re getting yourself into. That’s where a business loan agreement comes in.
The loan agreement is a document that lays out all the key details concerning the loan, from the term (how long you have to pay it off) to the collateral you put up to secure the loan. You need to understand every aspect of your business loan agreement clearly before signing and committing your company to its terms. This guide should help.
A business loan agreement is a legal document between you and your lender, whether that’s a bank, credit union, online lender or even a family member. It serves both parties by clarifying everything about the loan, including its repayment schedule and any collateral that secures it.
The specifics the lender will put in your loan agreement depend on your company’s financial standing, from its credit score to its annual revenue. Be advised that your loan comes at a cost — from interest to fees. Your loan agreement should make those costs crystal clear.
These agreements are legally binding contracts. That means that if you don’t hold up your end of the bargain (repaying the loan), they give the lender ability to pursue compensation. In most cases, that means seizing any collateral you put up to secure the loan.
The business loan agreement comes into play after you apply for the loan, and the lender completes underwriting (evaluates your company’s fitness for the loan) and approves the financing. Most established business lenders create the loan agreement, then send it to you for review.
If you’re having a hard time getting a loan, you might explore alternatives like a loan from a friend or family member. If a person or entity lending you money doesn’t create the business loan agreement, you should do it yourself.
This documentation is key in setting expectations and avoiding confusion (and potentially even lawsuits). If you need to create your own agreement, you can start with a business loan agreement template. Then, have an attorney review it before you or the lender signs.
If you looked up a business loan agreement template, you already know that these documents are usually multiple pages with several distinct sections. Most loan agreements include sections on:
From this date forward, your loan agreement becomes legally binding. Usually, this is the same date you get the loan proceeds from the lender.
This is basically your IOU — your promise (hence the name) to repay the lender what you borrowed plus interest.
The terms and conditions of a loan agreement are generally fairly meaty. They lay out key details like:
Some portion of your business loan agreement should clearly explain any penalty fees you can incur. This might have its own dedicated section or fall under terms and conditions.
Specifically, you should look for two potential penalties:
Most business loans are secured, meaning your company puts up collateral that the lender can seize if you don’t repay what you borrow. Usually, that’s tangible assets like equipment or inventory.
In some cases, you might need to also need personal guarantee to get a business loan. If so, the business loan agreement will explicitly state that you’ve made this guarantee. With that in the agreement, the lender can pursue your personal assets if your business can’t make good on what it borrowed.
The lender may have certain stipulations around the loan. The covenants section will lay those out. Common covenants include using the loan proceeds in a certain way, not taking on more debt until the loan is repaid and staying current on your tax payments and business insurance coverage.
This section explains two key things: when the lender considers you to have broken the loan agreement and what happens at that point.
Many lenders have a grace period for late payments, but if you pass that period, you’re considered to be in default.
The default section of business loan agreements often includes an acceleration clause. This clause says that once you reach default, the lender can accelerate your repayment and demand full repayment. At that point, if you can’t pay up, the lender can seize anything you put up as collateral.
To help you make sense of your business loan agreement, you can use this glossary of terms that lenders commonly use:
Getting a business loan means dealing with a lot of documents. After all of the paperwork, you might be tempted to skim the loan agreement. Don’t. If you do, you could find your business on the hook for unexpected costs like balloon payments or fees.
Before you sign, make sure you:
Even if you think you’ve found the best small business loan possible, don’t sign just yet. Carefully review the business loan agreement to ensure you’re not committing your company to something you didn’t expect. Getting a business attorney involved can help you fully understand the terms of the loan agreement.
This loan agreement is the legal contract that guides your business loan and binds you and the lender to its terms.
In most cases, your lender will create the loan agreement. If you’re getting a loan from an individual, though, and they don’t offer this agreement, you should create one yourself. Start with a business loan agreement template, then have a business attorney review it.
Before you sign, you should have complete clarity about how much money you’re getting from the loan, the repayment schedule for it and the cost of the loan, including interest and fees. You should also know about potential penalties and what happens if you default. The business loan agreement should answer all of those questions for you.
Arrow Right Personal Finance Contributor
Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance.
