A Business Loan Agreement is an agreement whereby a loan is provided to a business through a bank, organization, or an individual. The agreement documents the promises of both the parties – the promise by the lender to lend the money and the promise by the borrower to repay the money in time along with interest applicable.
When Do You Need a Business Loan Agreement
A business loan agreement is required when a business needs a loan for a specific purpose. The agreement acts as solid legal evidence that the loan has been provided. The purpose of a business loan agreement is to formally lay down what the parties have agreed to, what their responsibilities are and what the duration of the agreement should be. The purpose for which the loan is being given should also be clearly mentioned. If the loan for a purpose other than what is stated in the loan agreement, the lender can ask for the loan to be repaid immediately.
The agreement makes it clear under what terms and conditions is the loan is being provided to the borrower. Having an agreement in place avoids any confusion or misunderstandings between the parties and helps to protect the interests of both the parties. If the matter goes to the court, it also helps the court determine whether the terms and conditions of the agreement are being carried out and whether an event of default has occurred and what should be done consequently.
Inclusions in a Business Loan Agreement
The agreement must clearly state the names of the parties between whom the agreement is entered into. This will include the Creditor (the lender) and the Debtor (the borrower). The date on which the agreement is entered into, must also be mentioned along with the territory in which the agreement is enforceable.
The agreement must also mention the amount of the loan, the rate of interest that will be applicable, the date of repayment etc. All the necessary details such as the schedule for repayment, whether there will be any penalties for prepayment must be negotiated between the parties and laid out in the agreement.
Apart from this, the agreement must clearly mention under which law it will be governed and how the agreement shall be terminated. The manner in which the agreement is to be modified should also be described.
How to Draft a Business Loan Agreement
The following are the steps to follow while drafting a business loan agreement:
- Identify the parties between whom the agreement is to be created.
- Mention clearly whether the parties are individuals or companies.
- The details surrounding the transaction must be laid out – the loan amount, the frequency of payments, the date for repayment, the rate of interest etc.
- Mention details about the collateral provided by the borrower.
- Take into account all the possible events of default and provide remedies for them.
- Have a dispute resolution mechanism in place.
- Once the agreement is drafted, get it signed by all the parties and also notarized by a notary. This will help to prove the validity of the agreement.
Benefits of a Business Loan Agreement
- An agreement will clearly lay out the terms and conditions of repayment of the loan along with the rate of interest that is applicable. This avoids any confusion or misunderstandings between the parties.
- The agreement will also have a detailed dispute resolution process in place as well as remedies in case of an event of default. This helps to protect the interests of both the parties.
- In case of anything which requires a court’s intervention,, the loan agreement will help the court determine whether an event or default has occurred.
Consequences of Not Having a Business Loan Agreement
- If there is no business loan agreement in place, the lender has very limited remedies in case of a default on part of the buyer.
- In the absence of a written agreement, there is no solid evidence as to existence of the loan.
Key Clauses in a Business Loan Agreement
The following are the key terms of a business loan agreement:
- Loan Amount
- Length of time of the loan
- Rate of interest
- Promissory note
- Schedule for repayment
- Penalties for non-payment
- Default and events of default
- Remedies for events of default
- Acceleration clause
- Representations and warranties of the lender
- Representations and warranties of the borrower
- Affirmative covenants
- Negative covenants
- Limitation of liability
- Indemnification and damages
- Modification of the agreement
- Governing law and jurisdiction
- Termination of the agreement
What Happens When You Violate a Business Loan Agreement
A business loan agreement will have clauses detailing the actions to be taken by the lender when the borrower defaults on repayment of the loan or when either party breaches a covenant under the agreement.
When the borrower defaults on payment of an installment there might be various remedies available to the lender. These may include the entire loan amount becoming due and payable on the date of default or the lender taking possession of or foreclosing the collateral provided under the agreement. The borrower might also be liable to pay a penalty for delayed payments.
Many business loan agreements have a mandatory arbitration clause. Parties prefer this as it is a faster and cheaper process than going to the court.
The agreement can also mention that all disputes arising out of the agreement will be subject to the exclusive jurisdiction of a specified court.
Sample of a Business Loan Agreement
If you require a template of a business loan agreement, you can download a sample here.
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