A loan agreement is a contract between two parties to borrow money, goods or services. It details all of the terms that both parties must abide by in order for the contract to be valid and enforceable.
Common sections include details about the involved parties, a repayment plan and if interest will be charged. A severability clause is also often included to protect both parties.
Components of a Loan Agreement
A loan agreement is a formal contract between two parties that binds the lender and debtor to certain behaviors such as timely interest and principal payments. The document often includes a detailed payment schedule, a description of collateral offered to secure the loan and any fees such as ongoing or one-time disbursement expenses. It may also include a set-off clause that allows the lender to offset repayments with other balances owed between the parties.
The document usually begins with the names of all involved parties and their contact information. The purpose of the loan should be specified as well to avoid misunderstandings down the road. Collateral or guarantor details should be included as well, along with any successors responsible for the loan in the event of a borrower’s death or bankruptcy. Default definitions should be clearly outlined, including how many payments must be missed to qualify as such.
The loan agreement should also spell out what types of financial reporting the borrower must comply with on a regular basis. These reporting requirements can be a source of frustration for small business owners who may not know that they exist or when they’re required to report. A final section of the loan agreement typically describes how the loan is to be repaid and whether or not prepayment is allowed.
Borrower Information
The borrower information section is where you will find the details regarding the individual or legal entity that will be loaning you money. The information must include the full legal name, address, phone number and tax identification number (Sort ID). If they are a business, their business entity designation should be included as well. You also need to indicate whether they are a US citizen or not. This is important because if the borrower is a non-US citizen, they may be subject to additional requirements in order to qualify for the loan.
If you are charging interest on the borrowed amount, you will need to detail the type of interest that is being charged as well as how it will be calculated (simple or compound). You should also specify whether the borrower will be required to pay a prepayment fee if they choose to pay off the loan early.
If there is a guarantor to the loan, you will need to include the details of their agreement as well. A guarantor is essentially someone who agrees to take on responsibility for the loan should the borrower default on their obligations. If there are multiple guarantors, they must all sign the document. This is a common feature of many Term Loan Agreements, and the guarantor sections are often identical to those found in the Borrower information section.
Lender Information
The lender information contained in a loan agreement can differ from one document to another, but it generally includes a section that details the borrower and lender. This section will typically contain both the full legal name and Social Security number for each party. It may also include other identifying information such as the business name and the physical address. This section will also include any guarantor information, if applicable.
This section typically outlines the terms and conditions of the loan. This can include things like the amount borrowed, interest rate, repayment terms and collateral requirements, if any. This section will also specify the effective date of the loan and which state’s laws will govern it.
Most loan agreements will also include a section that describes the lender’s responsibilities in the event of a default. This can vary depending on the lender, but it is generally intended to protect the lender in the case of a default by the borrower. This section will often outline the procedures for recouping funds, if applicable, and the responsibilities of guarantors in the event of a default. Lastly, this section will usually also describe any prepayment penalties if applicable. These can be very costly, so it is important to understand them before entering into a loan agreement. If you have questions about this or any other aspect of a loan agreement, it is best to consult an experienced business attorney.
Guarantor Information
A guarantor is someone who vouches for the financial capacity of another person. The person who acts as a guarantor can be a parent, sibling, spouse, friend or colleague. They typically need to have a solid credit history, stable income and substantial cash liquidity.
The person who acts as a guarantor must sign the same documents that the borrower did during the rental application process, like bank statements and pay stubs. They also become responsible if the renter defaults on payments, so they should make sure that they can cover the debt in the event that something goes wrong.
Guarantors are often needed for borrowers who have a hard time qualifying for a loan or mortgage because of their financial circumstances. Having a guarantor can help them get approved when they might otherwise not be, especially if the lender has certain minimum requirements such as debt-to-income ratios or rent-to-income ratios.
When a person agrees to be a guarantor, they must be aware that it is a legally binding agreement and they will be responsible for covering the debt if the borrower fails to pay what they owe. A guarantor can be sued for the outstanding balance if they fail to meet their responsibilities, so this is not something to be taken lightly. Ideally, a guarantor will be asked to step in before the borrower is in a legal default because that may prevent large amounts of missed payments, or arrears, from building up and becoming a debt they are responsible for covering.