A small business loan is a credit facility availed by a small business owner. A business loan is provided by the lender to the borrower on the promise of timely repayment of the principal amount and interest (a small business loan usually comes with the interest charges). To avail a small business loan, the borrower has to meet the business loan eligibility criteria set by the lender. In addition, he also has to provide all the business loans documents for verification.
One important thing here is the CIBIL score. In order to avail a small business loan, the borrower must have a good CIBIL score. It is suggested if his CIBIL score does not meet the required threshold, you must first look for ways to improve your CIBIL score.
What is a Small Business Loan Agreement?
Also Read: SME Loan: Unsecured Business Loan For SMEs
The signing on a contract is required to confirm a deal between all the related parties. The same is with a business loan. The contract signed between the lender and the borrower is called a small business loan agreement. This agreement binds the lender and borrower. In the loan agreement, both the parties make promises to each other. The lender promises to lend money whereas the borrower promises to repay it on time.
In case of any problem from either of the parties, the business loan agreement will be the proof which will help in resolving problems in the court.
Why is a Small Business Loan Agreement Important?
No matter whether you are availing a machinery loan to upgrade your machinery to a working capital loan to increase working capital, you will have to sign a small business loan agreement is all the situations. Also, no matter you avail a bank loan or an NBFC business loan, a loan agreement is important.
A loan agreement is important to protect the interest of both the parties as well as their relationship. In an unfortunate situation, like if any party fails to comply with any term mentioned in the agreement, it can be taken to court.
What are the Points Mentioned in a Small Business Loan Agreement?
The following are the details mentioned in a small business loan agreement:
Amount & Tenure
A loan agreement includes the details related to the loan, i.e. loan amount, repayment tenure, and the effective date on which the business loan will be disbursed. The small business loan disbursal date is usually the date on which you sign the loan agreement.
The details of the two parties involved in the small business loan are usually mentioned at the beginning of the agreement. In case there is any co-signer (somebody who helps with collateral), then he is described in this section.
This point explains the interest that the borrower has to pay and what type of interest rate it will be, simple interest or compound interest or fixed or on reducing the amount. This clause also includes the information related to penalty charges in the case of late payment of EMI or default on the part of the borrower.
This is an important piece of information. The agreements include the definitions of the various key terms. This eliminates the scope of any miscommunication or misunderstanding. So, these definitions help in solving any disputes regarding the terms. It is imperative to read these definitions carefully before signing the dotted line.
This clause states how the loan will be repaid. A loan for business can be repaid on a periodic basis or in a lump sum amount at the end of the tenure. This depends on what the two parties have agreed upon and what is mentioned in the agreement. Further, it also specifies the amount of EMIs, number of EMIs, and their due dates.
In case the borrower decides to repay the small business loan early, he’ll be charged penalty. This clause all the details related to it. However, there are some NBFCs who do not charge any foreclosure charges. Read the benefits of early foreclosure of loan account.
The small business loan can be secured or an unsecured one. In detail, it can be availed with collateral or without collateral. If it is a collateral business loan, the lender can seize the collateral in case of default. This section includes the details regarding the collateral or collateral-free loan and the actions taken in case of default.
Availing a small business loan include other charges as well, such as processing fees. This clause includes details related to them – their explanation and amount. So, it is important for the borrower to read the fine print of the agreement before signing as there can be any clause nicely tucked in.
Each and every element of the small business loan agreement is vital and must be comprehended carefully. If there is something that you cannot understand completely, you can take the help of a lawyer. Nonetheless, it is always advisable to take time and read carefully the terms and conditions before signing the agreement.
ZipLoan is an RBI registered NBFC that offers SME loans to small businesses at minimal documentation. We offer loan at best business loan rates and do not have any hidden charges. All our business loan products are collateral-free and designed to help the small business owners in the best way.
Additionally, we charge only 3% of the loan amount as processing fee and levy no penalty on foreclosure of the business loan account. You can apply for business loan online and also upload the PDFs of all the documents online. Our representative will process your application and get back to you within a few hours. Also, our small business loan disbursal is very fast.