After your loan has been successfully applied for and you have been granted the loan. You need to know how to manage the loan, and you also need to know when you can pay back the loan.
This article will articulate the details you need to know and how to proceed after your loan has been granted.
Understanding the terms and conditions
It is natural for a small business owner to be ecstatic about receiving funds after a loan has been approved. Amid the excitement, the business owner will likely overlook the loan’s basic terms and conditions. A loan is a legal agreement between a borrower and a lender. It is the borrower’s responsibility to ensure that they fully understand the contract they are entering into.
As a result, you must consult an accountant or commercial lawyer before signing your legal agreement and receiving the funds. This way, you know exactly what you’re getting into. When you receive your legal contract, you will be required to initial each page.
By initialing each page, you indicate that you have read them all and understand and accept the terms. Make sure to read each page thoroughly. This will make you aware of the risks you are taking. It will ensure that you do not violate any of the loan agreement’s clauses (consciously or unconsciously).
Monitoring your loan
It is critical to monitor the loan agreement effectively now that you have reviewed and signed it. Depending on the lender, your business may be subject to a specific monitoring and evaluation process. Check with your lender directly about their monitoring procedures.
- Ensure that you use the funds for the loan application. Using the loan for something else may result in a breach of contract. If you need funds urgently for something else in your business – consult your lender and get their approval first.
- Review your repayment terms. Understand when to make your monthly repayments and whether the interest rates are fixed or flexible. Flexible interest rates mean that the rates on your loan will change depending on any central bank rate changes.
- Have your repayment calculations on the side and review this with what you are charged. Mistakes happen, and there is a chance that you may get over or undercharged on your monthly repayments. You want to be able to spot this, and
deal with it immediately.
Maintaining good communication with the lender.
You will communicate with the lender regularly during the loan application process. Once your loan has been approved, you must maintain an open and transparent communication model.
Keep your lender up to date on the progress of your business and inform them of any business risks that may put you at risk of defaulting or positive impacts that may result in you paying off the loan sooner or sudden growth that may necessitate a larger loan amount.
Whatever it is, it is easier to manage the process if you communicate with your lender regularly.
What to Watch Out for in Loan and Credit Contracts
Before you sign a new loan agreement or credit contract, carefully read the contract and look for clauses that are unfavorable to consumers. Consider shopping elsewhere if your contract includes anticonsumer provisions. Unfortunately, certain types of working conditions are fairly common in some industries. When you sign the contract, you’ll know exactly what you’re getting into and won’t be disappointed later.
Acceleration Clause: If you default, that is, miss a payment or otherwise violate a term of your loan agreement (for example, by failing to pay taxes or maintain required insurance), the lender can declare the entire balance due (“accelerate” the loan). If you miss one or two payments, the lender will likely agree to postpone the loan’s acceleration if you pay what you owe and the remaining balance on time.
Attorneys’ Fees: Many creditors include a provision in a loan agreement awarding them attorneys’ fees if you default and they have to sue you to get paid. If your contract contains this provision but says nothing about your right to attorneys’ fees, most states give you the freedom to attorneys’ fees if you are sued , or you sue , and you win.
Balloon Payment: To make loans seem affordable or qualify borrowers who couldn’t afford the monthly payments when they applied for loans that required repayment in equal monthly installments for a set period, some loans are set up with regular payments too small to pay off the loan. However, they have a final large payment called a balloon payment.
Pyramiding Late Fees: If you’re late on a loan payment (such as a car loan or personal loan), the lender normally imposes a late fee. These fees are generally permitted unless the lender engages in an accounting practice known as pyramiding. Pyramiding occurs when the lender assesses a late price that you don’t pay, then applies your regular payment to the late fee, and partially covers the due amount. You will never fully catch up on the payments owed, and the lender will impose a late fee every month, even when you pay on time. For the most part, pyramiding is prohibited.
Security Interest: When you take out a secured loan, you give the creditor the right to take your property that secures the loan or a portion of the property if you don’t pay. This is called a security interest. The two most common security interests are mortgages, where you give the lender the right to foreclose on your home if you miss payments, and car loans, where the lender can take the car if you default.
Wage Assignment: A wage assignment provision gives the lender the right to deduct pastdue payments on the loan directly from your paycheck. They are prohibited in many, but not all, types of contracts. To learn more, see Wage Assignments in Loans and Credit Contracts.
Waivers of Exemptions: If a creditor sues you and gets a court judgment, or you file for bankruptcy, some of your property is protected from your creditors that is, it can’t be taken to pay what you owe. This property is called exempt property. It usually includes your clothing and personal effects, household goods, and some of your home and car equity.
Mandatory Arbitration: A mandatory arbitration clause is increasingly being included in consumer contracts, including employment, credit, insurance, and even doctors’ services and hospital admission.
These clauses require you to waive your right to seek redress in court. Instead, it is preferable to resolve any disputes through a private, often costly arbitration system chosen by the business. Arbitration clauses, according to consumer advocates, frequently disadvantage consumers.
When signing contracts, keep an eye out for these clauses. Sometimes the arbitration agreement is separate from the contract, and other times it is buried among the many paragraphs.
Guidelines for Bank-term loans
What it is: Term loans are the most common type of commercial loan, and they are frequently used to finance a large investment in a business or an acquisition. The loans typically have fixed interest rates, monthly or quarterly repayment schedules, and a maturity date.
Bankers typically divide term loans into intermediate and longterm loans. Intermediate term loans are typically for less than three years and are repaid monthly installments (sometimes with balloon payments) from a company’s cash flow.
Longterm loans can last for 10 or 20 years and may include additional requirements such as collateral and limits on the amount of other financial commitments the business may make.
Upside: For established small businesses, term loans are frequently the best option. If your financial statements are sound and you are willing to make a significant down payment, you may be able to obtain financing with low monthly fees and total loan costs. Construction, major capital improvements, large capital investments such as machinery, working capital, and existing business purchases are the best uses for the loans.
Downside: Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can fully use ownershiprelated benefits, such as depreciation, and should compare the price with that leasing.
How to get it: Large banks are involved in commercial lending. However, it is also worthwhile to investigate local community banks specializing in business lending because they have more leeway in loan approval. Their officers can also provide helpful advice on obtaining financing. The financial strength required for loan approval varies greatly between banks, depending on the level of risk the bank is willing to take on. On the FDIC’s website, look for a potential bank and then click on “latest financial information.”
Look for “performance and condition ratios” and focus on the “total riskbased capital ratio,” which regulators require to be greater than 10% if a bank is considered wellcapitalized. The higher the ratio, the safer the bank’s financing.
Additional guidelines to consider when selecting a business bank:
- Ask friends where they bank and if they are satisfied.
- Forge a relationship with a bank long before you need a loan. It will help you find out how they will treat you. Believe it or not, banks want to talk to you even if they cannot lend you money.
- Scan local business news stories for evidence of who is making the kinds of loans you are seeking. Not all banks can be the best at everything. Some are better at business loans, while some are better at consumer deals.
- Visit two to four banks to find your fit. Be upfront, and tell them you are considering a loan and are talking with other banks. Then listen to their pitch.
- Think about working through the SBA or other economicdevelopment groups to secure better terms.
- They are not only for businesses that cannot get funding any other way.
When You Can’t Make Payments On Your Small Business Loan
Small business owners who cannot make payments on their backed loans face being sued by the bank that made the loan or declaring bankruptcy.
To avoid default, banks prefer to settle or revise loan terms, so small business owners should contact the bank as soon as they realize they will be unable to make payments.
Failure to Make Payments
If your small business fails or your company’s profits fall, causing you to fall behind on your small business loan payments, be aware that the bank may initiate legal proceedings against you to recover the guaranteed portion of the loan, which means the bank will sue you to either take possession of the collateral used to secure the loan or attempt to acquire any equity available. Even if the bank successfully obtains collateral or equity to pay the loan partially, you are still liable for the entire loan balance, and the bank can continue its collection efforts.
Banks are quick to sue small business owners that default on their loans because they know that the failed business will have many creditors, so they are trying to gain priority in the line of creditors.
Developing a Financial Plan
Before defaulting on their loans, small business owners experiencing financial difficulties should create a financial plan. If you can make a lower payment or require other assistance, make a plan before speaking with a lender to help you plead your case for alternative financing. Communicate with your lender regularly, providing updates on your situation and building a rapport with the representative assigned to your account. Many lenders will accept a settlement or even renegotiate the loan if you contact them early, keep your promises, and demonstrate that you are making a good faith effort to repay the loan.
If your business fails and you cannot repay your small business loan, you may need to consider bankruptcy. Filing bankruptcy may be a faster option if a small business owner is in severe financial distress because it can save the business and restructure debt payments. Be aware that once you file for bankruptcy, you will no longer be able to negotiate with your lender because the bankruptcy court will intervene and apply its rules effectively.