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