Small Business Loan Terms

small business loan terms

Getting an overview of the different small business loan terms will help you better understand your loan agreement. When getting a small business loan you will find that there are different loan terms to evaluate in your loan agreement such as interest rates, late charges, ect. You want to get the best small business loan possible therefore be prepared by learning about the different small business loan terms to expect.

It is important for you to know that terms in your small business loan can be negotiated. If you are not comfortable with the loan process seek advice from professionals such as attorneys, CPA (certified public accountant) or small business consultants. They can help you analyze the terms and conditions in your small business loan.

Business Terms you should know before negotiating a business loan

Below are listed some of the major small business loan terms you will find in your loan agreement. Familiarize yourself with these terms. Decide which small business loan terms are the most important for you and which terms you can be flexible with.

Due Date– Make an educated estimation of when you will be able to pay back the loan. Make sure you give yourself a reasonable amount of time.

Late charges– In the risky and unpredictable world of Entrepreneurship, things don’t always work out the way you planned. When things aren’t going as planned for your small business, the last thing you want is to be hit with all those late fees. Just in case you are not able to pay your payments on time make sure your late fee is reasonable.

Collateral– This is a scary one. In the dreaded event that you are not able to pay back your small business loan, your bank may require you to guarantee them your personal assets such as your house or property as collateral. If you can’t pay them back they have full authority to seize your house or other personal assets. Loans that are backed by collateral are called secured loans. Unsecured loans do not require collateral however they are more difficult to obtain. They are issued to the most credit worthy candidates.

Prepayment– You know that you will be charged a late fee if you do not make your payments on time, but did you know you can also be charged a penalty for paying off your loan too early? The reason behind this is that banks don’t like you paying back your loan too soon because that means less interest money for them. Of course you would want to pay off the loan the earliest possible so find out if they offer you this flexibility without charging you a penalty.

Loan Covenant– A lender may impose certain rules and restrictions on your small business to increase the chances of you being able to pay back the loan; this is called a loan covenant. For example they may prohibit your business from loaning money or may require you to submit monthly financial statements. Violations of these covenants can lead to a default on the loan. Keep in mind that a lender can decide to wave a covenant. Make sure your covenants do not pose any serious threats to your small business growing potential.

Interest Rates– Banks normally charge an interest rate of 6% and 9%. Getting an interest rate as closest to the prime rate is ideal. A prime rate is the interest rate lenders will charge their most high qualified candidates.

Fees– Always read loan documents carefully so you are not surprised by any hidden fees. Lenders may charge a fee for discretionary actions such as getting appraisals for your assets. Lenders may also charge processing fees. Be sure to get an estimate for these fees before accepting the loan. Also examine the attorney fees. Attorney fees are used to cover the costs of collecting on a loan if you fail to make payment. Make sure that these fees are reasonable.

Go back to Getting a Small Business Loan