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Business Loan Agreement And All You Need To Know About It

Business Loan Agreement is a contract between the lender and the borrower. The borrower lends the money from a lender in return for security or promises of repaying the loan. The business loan agreement contains all the logistics details of both parties, including the debt, business, borrower's details, bank details, policies, and promises of giving and repaying the money, etc.

Agreements are compulsory for taking business loans in India.

Why is the Business Loan Agreement Necessary in India?

Business owners in India require a big amount of loan. Nobody can trust with such a significant amount. That's why business loan agreement comes to the rescue. With its terms and conditions, business loan agreement plays the role of a guarantee from the borrower's side. It confirms that borrowers will repay the loan on time. The agreement also makes sure that if the borrower fails to pay the money, the lender has the right to claim their properties. Or charge them with penalties - whatever the business loan agreement states.

For borrowers in India, the business loan agreement is a guarantee that the lender is not cheating them in any way.

The business loan agreement must hold all the information of both parties - borrowers and lenders. Let’s have a look on details a business loan agreement of India generally contains:

Contents Included in Business Loan Agreement

When you take loans for business in India, each situation is different, and everything is negotiable. So, lenders prepare business loan agreements accordingly - based on the criteria of lender and requirement of the borrower. Here are the contents of a business loan agreement in India:

Effective Date

 It includes the particular date when you sign the business loan agreement - generally the date when you get the loan amount in hand or bank.

Relationship Between Two Parties

 It highlights the relationship between the borrower and the lender. For example, the address of the lender and borrower also signifies the relationship in the business loan agreement.

Loan Amount and Charges

 It depicts the total business loan amount taken and charges applicable. It also shows the total number of EMIs borrower has to pay.

Promissory Note

 The promissory note is a promise of the borrower to repay the lender. It can be a simple promise of repaying the loan described in words. Or maybe security in exchange as a promise to repay the business loan.

Collateral

 Collateral is a property of borrowers (land, building, vehicle, equipment) used as a security and guarantees that they will repay the loan. If borrowers fail to repay the business loan, banks or financial institutions will claim the property as their own.

Terms and Conditions

 This is the most critical part of a business loan agreement. Here, you will get the nitty-gritty details as an overview of your entire business loan journey:

 Here are the details covered by the terms and conditions:

  • Loan amount
  • Length of time to pay back the loan in EMIs (months)
  • Interest rate per year. Fix or flexible, depending on the bank rules
  • Repayment Schedule (when and how to pay)
  • Loan statement. For example, it may be a prepaid loan.

Penalties for Delayed Payment

 It covers the penalties or charges (in rupees or percentage) one has to pay if the business loan EMI payment gets delayed than the due date.

Penalties for Non Payment

It includes penalties if you don’t pay the loan at all. It goes beyond charges and states what will happen if you don’t repay the loan.

Defaults Conditions

Borrowers and lenders make promises, and if anyone of them fails to fulfill the promise, the business loan agreement considered the default. For instance, if the borrower fails to meet the terms and conditions defined, the deal goes default and the borrower has to face applicable penalties and fines.

Government Laws

When it comes to taking business loans in India, the government has its laws to follow. Each bank or financial institution has to follow those laws and must include them in agreement as well. Government laws differ from state to state.

Borrower’s Confirmations

As a borrower, you will be asked to confirm some statements as accurate. These statements generally ask your confirmation on your business' legal existence, your tax returns & payments, financial statements, the ability of the company to pay back the loan, etc. You may find many other statements on business loan agreements as per your lender’s policies.

Covenants

Last but not least, covenants cover the promises of both parties. It includes various types of agreement requirements throughout the business loan process.

 

Here are the common ones:

  • Proof of insurance on your security. For example, insurance of land, building, vehicle, equipment, or any other property.
  • Banks generally offer you to take life insurance as you are the borrower. If anything happens to you, your insurance company covers the remaining business loan It acts as another layer of security for lenders.
  • Proofs of all your tax payments and fees attached to assets. You have to provide property taxes and vehicle licenses as well.
  • The lender may ask you to pay expenses if you default. Attorney fees, collection fees, etc.are some of the common expenses for non-payers.
  • You may require to guarantee that you won’t take another loan while you are paying the current business loan.
  • You may have to promise that management won’t change.
  • Lenders may ask you to show strong financial statements depicting the longevity of the business and the ability to repay the loan.

Read Everything Before You Sign

Once you apply for a business loan in India, confirm all the promises you have to make and all the proofs you have to provide. Make sure your statements are true and able enough to reveal your repayment capacity. After knowing everything, you must go through a business loan agreement thoroughly before you sign it. Even if some sections of the loan agreement are written in tiny-winy words, don't ignore them. Read each point and clear all your doubts with the lender before you commit yourself and your company for the loan.

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