When you are negotiating a loan for your small or mid sized business with the factoring company you will likely both receive and provide a lot of documentation. While you may be aware of the supreme importance of these loan agreements, that doesn’t make them any easier to read and to understand. Understanding the fine print in a loan agreement can be very challenging, even for a trained professional and the sheer amount of legalese in the loan agreement makes hiring an attorney to represent your business a necessity. Even with the help of an attorney you will still have to read the fine print of the agreement. This article will discuss those items that you should pay attention to when reading through loan documents you are considering entering into.
To start with you should be intimately familiar with the key terms in the loan agreement. That means knowing how much you are going to borrow, the interest rate on the borrowing, and when you will have to pay back the loans. In loan terms that means the principle you are borrowing, the nominal interest rate and the term of the loan. More than anything those items dictate the loan and should be examined in depth. If you don’t have any experience with loans start by watching an instructional video online where you can get familiar with the terms and begin to learn more.
Next, you should look to the secondary language in the loan agreement that are of lesser importance than the key terms, but also of importance. Examples of this are loan covenants, minimum insurance levels, loan costs, and rights to audit and financial requirements for your loan to remain in good standing. Also pay attention to guarantees that you are making in which you are pledging your personal assets such as your home and car as security for the business loan. That means if the company defaults on the loans you are personally guaranteeing the lender can take away your house. Loan covenants are also important to understand. These are items that your lender uses to control your behavior either by penalizing you for making riskier decisions that limit the borrowers ability to take said risks, or by giving the lender the ability to call the loan when you violate certain financial terms and can, by making the loan immediately redeemable, put your business into default. While we only highlighted some of the ways these secondary items, you should educate yourself on all of the factors as all of the items can impact your loan and business.
Finally, one of the most important things to understand when you are looking in a loan agreement simply is not there. That is a monthly amortization schedule, though some of the smaller loans will provide this to you. No matter, it is easy to create an amortization schedule using an excel spreadsheet and having this available will allow you to understand how much interest you are paying as well as your total loan payments including principal, interest, and fees. Few items are more important to know than that, but you won’t find it in the loan agreement for some reason.