Close look at small business loan documents now could save you headaches later

Here’s why it’s not all over after you receive a call from a financial institution that your small business loan has been approved.

by: Hitesh Khan/

If like most entrepreneurs, you’re ecstatic and happily agree to sign the papers to close the deal and get the cheque after the phone call from the bank, it’s time to put the brakes on you enthusiasm for a moment.

It is good to understand the legal jargon in that stack of papers you will have to sign before the small business loan is disbursed. A close look at those documents now could save you a lot of headaches later.

Be mindful that your bargaining power over your small business loan vanishes completely after you’ve signed the documents.

The small business loan documents could be a bit overwhelming, but with the help of a lawyer of an independent loan specialist, you can get a full understanding of what the legalese means. In fact, many independent loan specialist encourage loan applicants to understand the loan documents before they even complete a formal application for a loan.

Generally, it’s a good idea to get the loan documents ahead of time so you have a chance to review them for a couple of days before you sign them. Most lenders won’t have a problem sending advance copies of the documents, but they will generally only do so if they’re specifically asked.

The documents can be somewhat complex – which is why you may need an independent loan specialist to help you understand what the fine print means.

Although it varies slightly from lender to lender, a small business loan package usually comprises several documents, including a loan agreement, a promissory note and some form of guarantee and surety agreement.

The loan agreement will contain what are commonly known as “representations and warranties” of the borrower. These provisions serve as your promise to the bank that you’ve complied with certain conditions. The bank will ask you to affirm, that you’re authorised to bind your business to the loan terms. You may also be asked to deliver your business’s financial reports for review, either annually or quarterly, for a term specified in the loan agreement.

Most banks may also require you to verify that all the information on your loan application is still true before they disburse the loan. Keep in mind that if your business has suffered a significant financial downturn that may affect your borrowing ability, avoid the temptation to keep it quiet. This is because it is generally in the lender’s interest to work out a solution.

If you believe your business cannot keep each of the outlined promises, you should contact your loan officer for clarification or modification of the language. Remember that all the loan documents are tied together, in that breaching a single promise is enough for the bank to declare your loan in default.

Because most start-up businesses have insufficient assets or operating history for the bank to risk a loan, lenders often require the principals of the business to guarantee the loan with personal assets.

In essence, a personal guarantee is your promise to the bank that, if your business fails and can’t pay the money back, you’ll pay back the loan with your personal holdings. The bank may ask the principals to secure the loan with the equity in their homes.

Don’t think you can simply walk away from a defaulted loan just as you can walk away from the business. Although banks are generally reluctant to foreclose on a personal residence to satisfy the loan obligations of a small business, be aware that the bank can and will force the sale of your house if it can’t recover the loan by any other method.

Many small-business advisers recommend negotiating a restricted number of years for the guarantee if the small business has been punctual in its payment schedule.

Also, be mindful that if you are not satisfied with a lender’s willingness to negotiate terms, take your business to a lender that will be more flexible. If you’ve been approved for a loan with one bank, chances are you can take a similar small business loan package to a competing bank and negotiate better terms.

With a little footwork or with the help of a loan specialist, and with close attention to the fine print coupled with a working knowledge of the legal issues in loan documents will help to make your business stronger and build a positive working relationship with your bank.

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