How closely do you read the small print in the contracts you sign? People have been skim-reading terms and conditions for decades, often ignoring or failing to understand important information, and it’s possible that the box-ticking necessary to agree to various websites’ terms and conditions has made the average person even less attentive to the details.
But the fine print tells you what will happen if making loan repayments becomes challenging. And as banks have been more reluctant to lend following the fallout from the recent crisis, applying for business loans from online lenders has grown in popularity.
When you borrow money for your business from a reputable loan crowdsourcing platform, there’s little reason to think that the terms and conditions will be anything unusual or onerous, or anything but transparent. But that doesn’t mean that the details aren’t important, or potentially damaging to your business if you fail to make repayments. Business owners are deemed to be responsible for their own financial decisions, or to have the good sense to involve an independent financial adviser, so the onus is on you to protect your own interests.
With that in mind – and stating loud and clearly that we recommend any credit agreement be read and understood in full before signing – we’ve highlighted 7 common small print terms in business loans to read up on carefully.
It might seem obvious, but bear with us. Arrangement fees and APR (annual percentage rate) ought to be transparent from the outset of any application; they’re the basis for your comparisons between lending providers – but they’re not the only financial figures to factor into your calculations. Look for additional fees and charges within the terms and conditions to be sure you’re aware of any extra costs for overpayments, early settlements or missed payments. If repaying early is a real possibility, you want to be sure your loan is flexible enough that you won’t be punished for doing so.
Your loan agreement should set out due dates for each segment of loan repayment; if you miss or are late with a payment, it’s possible that default interest will be charged. This is additional interest charged on the amount you have failed to pay, and it’s usually calculated daily from the date you should have made the payment to the date you do make the payment. The rate of interest will be set out within the terms of the loan – make sure you check what could be in store if you miss a payment.
You’ll need to pass credit checks, meet repayment assessments and provide company accounts in order to qualify for a business loan – but that may not be the only time you need to give lenders a look at your finances. Further assurance clauses can require borrowers to demonstrate to lenders, investors and/or the peer-to-peer lending platform that the business is in healthy financial shape at any time during the loan repayment period.
The majority of loans taken out will involve the borrower offering a personal guarantee against the loan. A personal guarantee is much, much more than a promise to do your best, and the word ‘personal’ hints at the real risks associated. It isn’t just the business that would be liable in the event of failure to repay, it’s the director offering the personal guarantee and his or her personal assets. If your contract stipulates a personal guarantee, be sure that you understand that your family assets may also be at stake.
Taking out a loan is a risk. How great a risk depends on the amount, the affordability and flexibility of repayment terms, and the extent of your liability in the event of failing to make repayments on time or defaulting. The reliance clause is there to protect lenders, investors and online lending platforms against any claim that you didn’t understand all the risks involved in requesting a loan. Quite simply, by signing, you accept the reliance clause stating that you have not relied on the words of the lender or platform in assessing the loan – you take responsibility for appraising and investigating the risks yourself.
These are the limitations of your loan, sometimes known as the loan covenant. These special terms set out certain things you agree to do or not to do. Typical examples include taking out additional loans which might take priority over the loan you’re signing for in the event of default, or loans over a certain value – or perhaps any loan at all. Be sure to check the special conditions of any credit agreement to make sure you don’t risk contravening the agreement in the months and years ahead.
Loans are typically either secured or unsecured. A secured loan means the money is offered against certain assets – property, investments, vehicles, stock or other items – known as security. If the borrower defaults then the security may be sold to repay the debt. It’s easy to assume that an unsecured loan means that the possessions of the company or owners of the business are safe from repossession in the event of default, but that’s not always the case. Do your due diligence and take advice on your exposure to risk.
As ever, if you’re in any doubt at all about the meaning, implications or risks of any loan and its terms and conditions, we strongly recommend consulting a suitably qualified independent financial adviser before you sign.
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