In a business loan agreement, how can the contract assure that the lender will be paid back in the case of default?
A business loan agreement is a contract between the lender and borrow, which contains provisions in case the borrower goes into default. The lender is protected through the following:
- The borrower typically must provide security and collateral to ensure that the loan is repaid and that the collateral assets are in good standing
- Each month, there is usually a grace period, which is a certain number of days after the due date when the loan can be paid without penalty. If the payment isn’t made within the grace period, the agreement spells out penalties.
- There may also be an acceleration clause, which indicates that the loan is immediately due and payable if the borrower is in default of its payments.
- The loan agreement usually provides that the borrower agrees to certain covenants that provide assurances that the lender will be at least partially repaid, such as: proof of insurance or collateral, life insurance with the lender as beneficiary, guarantees that the business will not take on additional debt, promise to provide financial statements to the lender periodically
How can a business loan agreement assure the lender that the borrower’s business is in good standing?
The borrower must attest to the following assurances in a business loan agreement, including providing proof where applicable, which attests to the viability of its business and its ability to repay the loan:
- assurance that the borrower is legally able to do business in the province.
- assurance that the borrower has filed all tax returns and has no outstanding taxes owing
- assurance that there are no liens or lawsuits against the business that could affect its ability to pay back the loan
- assurance that the financial statements of the business are true and accurate.
