Financial Documents
Loan Document Review Guide
Key terms and provisions to review before accepting business financing. Understanding your loan documents helps you compare offers accurately and avoid costly surprises after signing.
Before you review
Loan documents are legally binding financial commitments. The nine topics below cover the provisions that most often create problems for borrowers after signing. Review each one carefully before you commit. This guide is informational — it is not financial advice, and significant financing decisions should involve consultation with a qualified financial or legal professional.
Annual Percentage Rate (APR)
APR reflects the true annual cost of borrowing, including interest and most fees, expressed as a percentage. A loan with a low stated interest rate can have a much higher APR once origination fees, points, and other charges are factored in. Always compare loans using APR rather than interest rate alone.
Fees
Loan documents often include origination fees, processing fees, underwriting fees, documentation fees, and prepayment penalties. These can add thousands of dollars to the cost of a loan. Ask for a complete fee schedule before signing and request that fees be incorporated into the APR calculation so you can compare offers accurately.
Payment schedule
Review the full amortization schedule to understand exactly how much is due each period, how much of each payment applies to principal vs. interest, and when the loan is fully paid off. Confirm whether payments are fixed or variable, and whether there is a final balloon payment that differs from regular payments.
Collateral and security interests
Many business loans require collateral — assets the lender can seize if you default. Review exactly what assets are pledged, whether the lender's security interest extends to after-acquired assets, and whether any existing liens must be subordinated. UCC filings create public records of these interests and affect your ability to obtain future financing.
Default provisions
Loan agreements define specific events of default beyond missed payments. Common examples include material adverse change clauses, covenant violations (minimum revenue, cash, or EBITDA requirements), cross-default provisions (defaulting on one loan triggers default on all), and failure to maintain required insurance or reporting.
Balloon payments
Some loans feature low regular payments followed by a large final payment (the balloon). If the balloon payment is not refinanced or paid from available funds, the borrower may default. Confirm whether your loan has a balloon payment, the exact amount and timing, and your options for refinancing or extending the term before the balloon is due.
Personal guarantees
Business lenders often require owners to personally guarantee the loan, making you personally liable if the business cannot repay. Guarantees may be unlimited (full loan amount) or limited, and they may survive the sale of your business interest. Understand what you are personally pledging before signing any guarantee.
Acceleration clauses
Acceleration clauses allow the lender to demand immediate repayment of the entire outstanding balance upon a triggering event, such as default, covenant violation, or transfer of ownership. The acceleration right may be automatic or at the lender's discretion. Understand the triggers and your cure rights before they arise.
Early payoff conditions
Many loans include prepayment penalties that make early payoff more expensive than completing the scheduled payments. Penalties may be a flat fee, a percentage of the outstanding balance, or a yield maintenance calculation. If you anticipate paying off the loan early, confirm the exact prepayment terms before signing.
Important notice
This guide provides general educational information about loan document provisions. It is not financial or legal advice. Consult a qualified financial advisor or attorney before making significant financing decisions.
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