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If you're considering a business loan and want to know more about business loan contracts, including what is expected from you and from your lender, find out more in this guide.
What's in this guide?
What's a business loan contract?
A business loan contract is a written legal agreement between a business and a lender of a business loan. The premise is a promise from the lender to provide funding and the promise of the borrower to repay it, with interest. Loan contracts also protect the interests of both parties by outlining and enforcing the terms of the loan. These terms include factors such as interest and fee payments, the length of the loan, conditions and clauses.
Elements of a business loan contract
Business loan contracts will vary from lender to lender. That being said, here are some of the features that you can expect to find outlined in a business loan agreement:
How much finance the lender is willing to provide your business based on its (and your) financial circumstances.
How long you have to repay the loan. This should also include information on whether or not the loan can be extended.
Which governing laws the contract is drawn up in accordance with should be outlined in the document.
Conditions precedents (CPs) are outlined in the loan contract. These represent certain conditions that the borrower must meet in order to be granted the loan amount.
Committed or uncommitted loan agreement
A loan can be either committed or uncommitted. In a committed loan agreement, the lender is contractually obligated to lend the loan amount to the borrower (as long as CPs are satisfied).
If the loan is secured, there will be details of the security in the loan contract.
Whether your business loan interest rate is fixed or variable will be established in the contract. It will also highlight how much interest you have to pay. This is displayed as a percentage of the loan amount and usually calculated per annum. However, depending on the lender, you could be subject to pay a monthly or even a weekly interest rate.
How often you have to make your repayments. This could be weekly or fortnightly, but it is usually monthly. Most lenders require fixed term repayments, but some may require on-demand payments.
Loan contracts will also outline whether or not extra repayments can be made, or whether the loan can be repaid early.
An outline of fees is highlighted in the contract terms. These may include administration, monthly, annual, extra repayment or default fees.
Events of default
There will be terms outlined of how the lender will reclaim its money if you were to default on the loan. This may include asset repossession or legal action.
Bilateral or syndicated
The business loan contract should highlight whether the loan is between one lender and one business (bilateral) or one business and multiple lenders (syndicated). Bilateral loans are more common for simpler transactions or smaller amounts of funding. Syndicated loans may be more commonplace with larger commercial loans, which require investment from multiple sources.
The contract should outline whether amendments can be made to the contract terms. This could include whether the borrower and the lender need to agree to the amendments, or if the lender can make amendments of its own accord.
I have a small business, how can a business loan contract help me?
While larger businesses may have more negotiating power when it comes to business loan contracts, small businesses still benefit from loan contracts. A small business loan contract helps the borrower by legally protecting them from unfair treatment from finance providers. In a small business loan contract, one of the parties to the contract must be a small business. The law defines a 'small business' as a business that employs fewer than 20 people (including casual staff) at the time it enters the contract.
Small business loan contracts will differ from lender to lender, but a number of them are regulated by ASIC (Australian Securities & Investments Commission). Under the New Banking Code of Practice 2019, ASIC acts to protect small businesses from unfair contract terms set out by lenders.
The significance of the New Banking Code of Practice
The New Banking Code of Practice, which came into effect on 1 July 2019, aims to tackle unfair lending terms. Participating banks have placed restraints on themselves that prevent them from applying unfair clauses to their loan contracts.
Lenders who are found to pose unfair clauses in their business loan contracts could face ASIC action. Unfair clauses can be deemed void by a court. However, this rarely invalidates the entire loan contract.
What's a standard form contract?
Most commonly, small business loan contracts are "standard form contracts". This type of contract is outlined by one of the participating parties, i.e. by the lender. In the case of a standard form contract there is generally no negotiation by the other party, i.e. the small business.
Generally, business loan lenders have set standard form contracts that they can alter, depending on the circumstances of the business. These documents will be provided to businesses when they successfully apply for a loan, for them to either agree to or reject. Often with standard form contracts there is little room for bargaining power from the borrower. However, this will depend on the lender.
Business loan contract templates
In some circumstances, you may have the option to use a business loan contract template, instead of a standard form contract. Business loan contract templates can be used when you are getting a private loan from an individual, as opposed to a bank or other lender. Free business loan contract templates can be found easily online.
However, it is advisable to seek professional financial advice prior to attempting to draft up your own contract.
What to remember
If you're looking for a business loan, remember to compare your options thoroughly prior to submitting an application. If your application is approved, read the contract as carefully as possible. It is also always advisable to seek professional financial advice before you sign on the dotted line.
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