When securing a commercial loan, borrowers often focus on the big numbers—loan amount, interest rate, and repayment terms. However, the details in your loan agreement can significantly impact your financial obligations. Understanding your loan agreement is essential to avoiding surprises and ensuring your business is prepared for all potential costs.
Key Components of Your Commercial Loan Agreement
A commercial loan agreement is a legally binding contract that outlines the terms and conditions of your loan. While every lender has unique terms, some key sections appear in most agreements:
1. Loan Amount & Repayment Terms
The agreement specifies the total loan amount, repayment schedule, and any prepayment penalties. Understanding the repayment structure helps you plan your cash flow accordingly.
2. Interest Rate & Calculation Method
Interest can be fixed or variable. Some lenders calculate interest daily, while others use a monthly or annual method. Be sure you understand how your interest is computed and whether rate adjustments are possible.
3. Fees & Hidden Costs
Loan agreements often contain fees that borrowers overlook. Common fees include:
- Origination Fee – Charged for processing the loan, typically 1% to 5% of the loan amount.
- Underwriting Fee – Covers the lender’s review of financial documents and creditworthiness.
- Application Fee – A non-refundable fee paid upfront.
- Prepayment Penalties – Charges incurred for paying off the loan early.
- Late Payment Fees – Additional costs if payments are not made on time.
- Legal & Administrative Fees – Covers the lender’s legal review and document preparation.
- Exit Fee – Some loans require a payment upon loan closure or early payoff.
4. Collateral Requirements & Personal Guarantees
Many commercial loans require collateral, such as real estate or equipment. If the borrower defaults, the lender has the right to seize these assets. Some agreements also include personal guarantees, making business owners personally liable for repayment.
5. Covenants & Restrictions
Loan covenants dictate certain financial or operational conditions that must be met. Common examples include:
- Debt Service Coverage Ratio (DSCR) – Requires the borrower to maintain a certain level of income relative to debt obligations.
- Restrictions on Additional Debt – Limits your ability to take on new loans without lender approval.
- Financial Reporting Requirements – Mandates the submission of financial statements at specified intervals.
6. Default & Remedies
The agreement will define what constitutes a default, such as missed payments, bankruptcy, or failing to meet covenants. It also outlines the lender’s rights in case of default, including legal action or asset seizure.
Why Reviewing Your Loan Agreement Matters
Many borrowers sign loan agreements without thoroughly reviewing the fine print. Here’s why careful review is crucial:
- Avoid Unexpected Fees – Understanding all charges prevents financial strain.
- Ensure Compliance – Meeting covenant requirements keeps your loan in good standing.
- Protect Your Assets – Knowing collateral obligations helps mitigate risks.
- Plan for Loan Costs – Budgeting for fees and penalties prevents cash flow disruptions.
Final Thoughts
A commercial loan can be a valuable tool for business growth, but it’s vital to understand every detail in your loan agreement. Take the time to review all terms, ask your lender questions, and consult a financial advisor if needed. By knowing what’s in your loan agreement, you can make informed decisions and avoid costly surprises.
At Genesis Global Investment Group, we believe in transparency and helping borrowers navigate the commercial lending process. If you have questions about your loan agreement or need financing solutions, contact us today!