Signing a Business Loan Agreement? Consider These 5 Things First

Updated on: 04 Jan 2024 // 3 min read // Business Loans
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Entrepreneurship opens the gate to myriad possibilities. The more your business grows, the more rewarding are your efforts. Are you looking forward towards expanding your business? No funds to finance it? Business Loan is the answer. Expanding your business, increasing your market reach or adding new products to the product kitty will no wonder activate your growth prospects!

Do not be in a hurry to buy a business loan. It can be a great source of capital, but if you aren’t properly prepared and ignorant of the terms and conditions, you may regret it later. To avoid or minimize any unpleasant surprises or regrets, look for unfavorable clauses. Consider these five things before getting locked into a business loan contract.

Don’t Apply for Multiple Loans

If you have applied for a business loan at multiple places, you may end up negatively impacting your credit score. If you are driven by the notion that out of the many, at least the approval of one is certain, you are wrong. All lenders run credit checks; hence all applications will be under the scan. This will let different lenders know about your applying for a loan at multiple places via the credit report. This may result in rejection.

Know about the Cost of the Loan

Has your chosen lender described the cost of your loan? It can be the interest rate or the total amount of money for repayment. For easy analysis, ask your lender about the loan’s Annual Percentage Rate (APR). It is the total cost of a loan including fees over one year. Costs may vary according to the tenure of your loan. The APR may be high for short-term and low for long-term loans.

Check for Unexpected Fees

Read the terms and conditions cautiously to find out if the ‘fees’ part is vaguely worded. Ask your lender for any unexpected fees that are left out of the contract. If all fees aren’t outlined and your loan comes with hidden fees, you will end up getting frustrated later. Know about its long-term implications and cash flow issues if any.

Prepayment Penalties

It is natural for an entrepreneur to look for ways to maximize profits and minimize costs. If you happen to take the loan and the investment brings rich dividends, you may plan to repay your loan in full before the scheduled tenure. With prepayment, you will certainly gain on paying less interest but your lender will lose the revenue on it. In such cases, many lenders charge a prepayment penalty. Know how much prepayment penalty your chosen lender may charge before you sign the Business Loan Agreement.

Assets at Stake in Case of Failed Loan Repayment

For a secured business loan to be approved, lenders consider its security by collateral, a lien, or a personal guarantee. So, how will you back your loan? Consider your specific collateral. In the future, if you fail to repay your loan, your lender has the right to seize the specified collateral.

Reading the terms and conditions word by word will help you avoid mistakes. Following the aforementioned tips, you can evaluate the basics of the loan and steer clear of any issues. Every business is different; hence consider all factors suiting your business type before signing a Business Loan agreement.