Understanding Business Loan Documents

Business loan documents are set of papers that fully detail the terms and conditions of every lending transaction. These documents are presented in legal forms of letters, contracts, covenants, or agreement. Signatures of the borrower and the lender are affixed to the document and serve as the legal binding affirmation that all written provisions in the papers are agreed between the involved parties. There are a few different types of forms that serve different functions.

Loan Proposal

This document describes all detailed information about the loan that the borrower intends to negotiate with the lender. Typically, the borrower indicates the amount of capital they want to borrow, the reason or purpose of the loan, what proceeds the money goes into, and the type of business loan he is applying. Other basic information that this loan document consists of are the company's name and its physical address, a management profile which is compose of the owner's name, their Social Security Numbers, educational background, qualifications, and accomplishments, and a summary of the business' financial competitiveness.

Loan Agreement

This loan document is a legal binding form where the borrower and the lending company representatives append their signatures proving that each term and condition are understood and acknowledged. This paper details all of the loan terms like:

  • amount of loan - how much capital is borrowed
  • repayment schedule - the exact date (month, day, year) the client should start to repay the loan and when it ends
  • interest rates - the annual percentage rate of the loan based on the amount borrowed
  • fees and expenses - related charges involved in the loan processing (e.g. loan fee, reimbursement costs, appraisal fee, documentation fees, title report fees)
  • representations and warranties - statement of factual information about the business declared by the borrower in the contract

Loan Covenant

The loan covenant document enumerates the conditions in which the borrower must abide and perform to make sure that the loan terms and provisions are honored. Some of the demands stated on this form are continuous sufficient cash flow, preservation of equity, maintenance of business insurance, efficient payment of taxes and other government fees.

Aside from mentioning the things that the borrower must comply, it also specifies what the client must not do. Some of these limitations may include not allowing the business to change its key management personnel, avail other loans, or merge with another company without the approval of the lender.

Promissory Note

This form provides a comprehensive description of the terms of the loan like repayment timetable, interest rates, principal amount, and maturity date. It also states the condition of agreement or provisions in the event the loan becomes a default. This document is commonly combined with the "loan agreement" instrument.

Personal Guarantee

This loan document fully describes the personal warranties offered by the borrower to the lending institution. The fund providers are guaranteed that the loan will be repaid. Details included in this note are the personal assets or properties of the client which he pledged as collateral to secure the loan in the event the business encounters financial struggles and cannot pay back the loan.