In the business world, companies borrow money to grow, control their cash flow, or even make investments in new ventures. Be it a micro business or an incorporated corporation, a business loan is the chief source of funds provided according to need.
However, loan acquisition is not all about just signing an application form and voilà, one gets the money. It contains a formal procedure comprising the submission of all types of documents, and most importantly, the closing documents.
They are legal papers signed before the actual closure of the loan and dispensing of the funds. The documentation serves as an affirmation of the agreement between the borrower-the business owner-and the lender, usually a bank or financial institution.
Business loan closing documents are discussed below, as their importance, and the key sections contained in these documents.
Business loan closing documents are the legal agreements and papers signed by a borrower and the financial institution that provided the loan to the business owner when the business loan is finalized.
The documents contain all the terms and conditions of the loan clearly mentioned by a lender, it is highly recommended to the borrower to go through them carefully before signing the document.
Closing documents are important in any unsecured business loan process for a number of reasons. They act as a formal and legal contract between the borrower and the lender.
Following are some reasons why closing documents are so crucial:
Closing documents provide protection in a legal sense to the borrower and the lender. In case there is some dispute in the future between the two parties concerning the loan, then such issues can be sorted out using these documents as they have all the terms and conditions relating to the loan.
These documents contain all the details clearly which the borrower should clearly be aware of. By reading and understanding the closing documents, the borrower will know exactly what they are agreeing to-such factors as repayment terms, interest rates, and other obligations that may help avoid any confusion later.
This document explains to what extent the borrower must pay when the payments would fall due, and the consequences of default by the borrower. These documents also reveal what, if anything, is the collateral involved, and under what conditions the lender can take action to recover the loan.
Detailing the terms down in writing, in the closing documents, reduces the risk of misunderstanding. Both parties will agree upon the same terms, hence reducing any chances of future issues and disputes appearing in the future.
The closing documents of an instant business loan might be long and somewhat complicated, but they contain a few key sections that, basically, are important to understand.
Let's go through some of the major sections:
It is the primary document that contains all the terms and conditions of the loan, such as the amount of the loan, rate of interest, and mode of payment, and can include prepayment penalties or late fees, etc. Basically, a loan agreement is a sort of contract between the borrower and the lender.
A promissory note is a written promise by the borrower to pay back the loan in accordance with the agreed-upon terms. It mentions the amount lent, the interest rate, and how the amount will be returned within a given timeframe. This note sometimes also mentions what will happen if the borrower does not repay.
In some rare scenarios, the lender will require an additional personal guarantee from the owner of the business. This shows that the owner of the business will be personally liable for the repayment in case the company is unable or fails to meet the payment obligations. This gives further comfort to the lender for the loaned amount, with certainty of return even if the business fails financially.
The closing documents will be inclusive of a security agreement if the business loan is collateral-based. This document lists the different assets that the borrower is using to secure or collateralize the loan. It may be equipment or machinery, property, or other assets of the business. The security agreement provides the right to the lender to seize or take over these assets in case the borrower defaults on the loan.
This schedule helps the borrower to know the outstanding loan balance, monthly EMI, remaining tenure of the loan, and how much of each payment is meant to reduce the principal amount.
This part of the section will explain in detail clearly what happens when a borrower does not fulfill their part of the agreement as mentioned in the loan. This then explains late payment penalties, the default process, and actions that the lender may take in recovering the loan through acquiring collateral or any other legal ways.
Every owner of a business should understand the closing documents for a business loan. These documents will not only put the agreement of a loan on paper but will protect a borrower and a lender by defining and outlining certain terms and obligations of the loan.
The ability to know what each section means will help the borrower avoid possible future complications and ensure that the process for paying the money back goes according to the paperwork.
Taking a business loan from NBFCs is a good option since NBFCs offer relatively more flexible loan options, quick processing, and fewer document requirements than traditional banks.
They are particularly useful for SMEs since most of their eligibility criteria are easy and they could extend customized loan products. For businesses that need quick access to money without too much heavy paperwork, NBFCs are a feasible alternative that proves to be effective.
