Before You Sign: 3 Important Loan Contract Terms to Review


    In the era of clicking “I agree” on just about every terms of service agreement, it’s important for you to read your loan documents. Unlike technology privacy policies or other service contracts, your loan document is packed with details and requirements for your business. Ignoring what’s expected of you means the bank will recall the loan, leaving you without the funds you needed in the first place.

    It may be a common belief that banks hide nefarious terms throughout loan agreements to play “gotcha” with business owners, but understanding a loan agreement comes down to simple awareness. Before you sign, ask your lender questions. If you’re struggling to follow the more technical aspects, review it briefly with an attorney or an experienced business owner.

    “Borrowing money and lending money is based on trust,” said Rene Kakebeen, a lending specialist who provides small business loans. “Borrowers need to read [the agreements] and understand what they’re saying. And if they don’t understand, they should either ask the lender or go to their attorney.”

    Loan agreements are broken down into several different sections. The most important sections for small business owners are the positive covenants, negative covenants and reporting requirements, according to Kakebeen. These three sections outline everything you can and can’t do, and they provide a framework for annual or quarterly reporting habits. These sections, and the section detailing defaults, are the areas you should scrutinize before you sign.

    Taking out a loan means more than just meeting your payments each month.

    “They [borrowers] think in terms of repaying my debt,” said Stuart Wolfe, an attorney at Wolfe & Wyman who handles finance loan agreements. “The terms seep into much larger issues in your company’s affairs.”

    Loan terms can apply to aspects like a change in ownership (even if the business is being passed on to a family member), a change in business insurance or making the lender your primary bank for the duration of the loan. Some terms even extend beyond the primary company to its subsidiaries, according to Wolfe.

    Getting a small business loan means ironing out exactly what it is you need to do so you stay compliant with your bank. This allows you to get the loan that fits your business’s needs best, and it provides you with the opportunity to build a relationship with your lender.

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