This article is written by Shivani Garg pursuing Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction 

“It is a rule . . . in all the world that interest is to be paid on borrowed money. May I say something about interest? Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” ―  J. Reuben Clark Jr.

Loan it up! These are the three words that often cross my mind whenever I think of starting my business and deep down willing to make it big someday, you know like getting it listed on the stock exchange and so on. Being well aware of the fact, that easier as it sounds like, the more difficult it is to make it become the reality. Even then, I bet it could be the most beautiful dream come to life. I am sure there must be an endless number of people out there who just can’t go merry while thinking of working for somebody else and making a little penny in such an expensive world I say. Well, there is nothing wrong with that, after all, the world is changing into an entrepreneurial era. You can literally see banks today moving to privatization. We all know whether it’s about starting a business/startup or expanding the ongoing business, we all require funds. Not every time we have that, so in the end, we do borrow money from outside sources which can be any, depending upon your feasibility at the end. The term for borrowing money is known as loan. One cannot afford to make mistakes while buying a loan for their business. It’s a huge task and more likely to change one’s future forever. You know, turn it into a fortune or drown you deep down in debts. To take you out from any mishap, I have collected a few things to be kept in mind particularly while you are looking for financing your business.

Let’s talk about loans for your business at a glance with what you know while entering into a loan agreement. 

What is a business loan agreement

In simple terms, a business loan is a loan taken for commercial purposes. In legal terms, the business loan agreement is an understanding between a business and a lender. The document put forth the promises made by both the parties – the promise by the lender to give money and the promise by the borrower to repay that money. It acts as a two-way street protecting both the borrower and the lender. This agreement just not outlines the terms and conditions but also the expectations that will help you avoid misunderstandings along with guiding you through the process of repaying your loan. You know it’s important for all the parties to clearly understand the terms of the document before signing, right? There are many kinds of loans available in your country for business but few things about the loan agreements remain constant in all.

Things you must know about the business loan agreement

Even when it comes to loan agreements for your business, the world is your oyster, you choose whatever you want. Yet there are few things you can jot down while choosing. Here it is:

• Interest rate

“Do a little research to get a sense of how low the lender is capable of going, and push for as close to that as your credit score and borrower profile will allow,” said Chris Motola, small business analyst at Merchant Maverick. The rate of interest depends upon the lender to lender and kind of loan agreement as in the purpose of taking a loan. Before you sign the loan agreement, you must know the kind of interest you have to pay on the loan you are taking and what kind of effect it has on the repayment amount. Just not that, is it feasible for you or not. I mean nobody wants a higher rate of interest on the loan amount.

• Prepayment penalty

Did you know that such a thing can exist? I bet most of you don’t, which is why most borrowers overlook this part. So what happens is, if you choose to prepay your business loan than the time period agreed upon in your document, then you may have to pay the prepayment penalty as well. What if the cost of the penalty outweighs the savings you were hoping to make by prepaying the loan and realizing that it backfired? Pretty devastating scenario? It’s better to go through such a clause and other terms and conditions attached to it before signing the loan agreement. 

• Penalty on default

Sometimes in between the loan term period, you might be short of funds to pay the EMI amount. You should sort this part prior as to how you will deal in times like these. Different lenders charge the penalty differently, therefore never skip on reading the agreement thoroughly. Don’t act foolishly just because you are in desperate need.

• The guarantor’s role

Guarantor seems to be one of the conditions for business loan eligibility criteria. That is to say, if the borrower defaults, the guarantor is liable to pay debts. The stake is high!

Well, there is a catch in all this. What if I say the terms that sound so stressful to you are actually quite negotiable.  All it takes is doing your homework right by having prior knowledge of the things which is to say you can get by putting your time in doing some ground research on the points mentioned above and going to the right banks. Negotiating your terms of business loan rightly takes your business to the next level smoothly in any situation. Since RBI is the one making laws and amendments in our country, you should always keep up with changes it comes up with from time to time, especially when times are like COVID-19.

Reserve Bank of India (RBI) updates

Are you not wondering what the RBI is up for a business loan agreement? Let me give you pointers just in case you missed out:

• Banks and NBFCs roll out ‘loan restructuring scheme’ for COVID-19 related stress
• To provide adequate support to the borrowers following the lifting of the moratorium (which has been extended to 6 months) on repayment of debts. Just in case you don’t know what Moratorium is, it is a lawful agreement agreed to by borrowers to postpone payment.
• RBI has permitted one-time restructuring of both corporate and retail loans without getting classified as a non-performing asset (NPA).
• Customers have the option to discontinue the Standard Deduction (SI) for EMI’s deductions.
• Impact on corporate accounts- So, in case you being a financial entity is unable to pay the collective EMI’s along with interest rate, the entity’s account will turn into a non-performing asset (NPA) on the third strike, which is to say enough time will be given to repayment.

What’s more, to avail of this moratorium, the loan borrower simply needs to write an email or contact the respective bank, NBFC, or concerned lender. It seems like they are doing everything to keep the boat sailing.

Impact of COVID-19

Amidst the lockdown, there was terror among people that even if they anyhow managed to survive the pandemic, they would die out of hunger as many people were out of business nevertheless. Consider it a blessing if your business managed to stand this storm last year. To ease up the things for business, RBI gave a good helping hand to the dooming businesses. In 2020, RBI allowed a debt reconstructing scheme for all the stressed MSMEs. 

Well, in that scheme the loans provided by RBI were fairly enough to survive them in COVID but that wasn’t enough to address their recovery concern. Right now, the country is having the worst hit of the second wave and MSMEs are hoping for a stronger moratorium than the last one. Just not that, last year, the government actually put the freeze on fresh Insolvency and Bankruptcy Code (IBC) cases last year for approximately 12 months to help stressed borrowers hit by COVID-19. The impact of the pandemic is so bad that Raghuram Rajan, former Chief Advisor to the Government of India, has said that if the current situation extends for the next 30 days, then a minimum of 45% of MSMEs will be dead, which is to say a huge number. What is more to say, when we all know every segment of the country is facing a crisis? You see, lockdown can bring down the number of cases probably (we can’t lose all hope, right?) but it will crash the lives of many with all the source of livelihood going dead. If we come on what is happening in the banking sector with respect to loans, some are anxious while others remain optimistic.

Conclusion 

I might have focused on things in general on loan agreement if it would have been any other time but we all know that things will never be going to what they were prior. So it’s better to know what the current situation is and how you can turn the tables for your business. Since tomorrow is not promised it’s even hard to say what changes will be there in the coming months. Apart from that, one thing you should keep in mind is that your relationship with the bank is one major factor that decides the success of negotiation for your loan agreement. The majority of reliefs are only provided to businesses that are doing well in a post-COVID-19 situation. Even then there are things you just can’t miss out on while entering into a loan agreement. Robert Kiyosaki, an American businessman, and author, once said, “Good debt is a powerful tool, but a bad debt can kill you’’. It’s upon you to decide which one to choose and where to land!

Reference

• http://www.thebalancesmb.com

• https://www.tatacapital.com/blog/business-loan/things-everyone-must-know-about-a-business-loan-agreement/
• http://www.businessnewsdaily.com

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