What to Look For in Your Business Loan Agreement’s Fine Print

Applying for a business loan and securing its approval can be a lengthy process. The actual approval time varies widely depending on the type of loan, its complexity, and the borrower’s timeliness providing the necessary information. This guide from SBA can help you gather the right paperwork, whether you’re applying for an SBA loan or a regular business loan.

But knowing exactly what you’re signing up for is just as important as rounding up the details and completing the paperwork accurately. If you’ve ever purchased a car and found yourself surprised when extra line items turn up on your monthly billing statement, then you’ll know the feeling. With loan agreements, there are devils in the details. That’s why it’s critical to pay attention to the fine print, often found in the promissory note or security interest section of the agreement.

Here are some tips for what to look for and how to avoid potentially costly mistakes:

Common Details Buried in the Fine Print

Some of the key terms that make up a loan agreement aren’t always as explicit as one might hope. The fine print, for example, can include detailed and complex technicalities, qualifications or restrictions of the agreement, and even vital information about the loan’s terms. Things to look out for include:

• Whether the interest rate is fixed or variable (and when it will change)
• Payment schedules, grace periods and late payment fees
• Prepayment penalties if you pay off the loan early
• The lender’s definitions of default and the penalties incurred

You may think it would be impossible to overlook these details. But often in the excitement of the moment, there’s a risk of signing a loan agreement without having a clear understanding of what you’re getting into – always a bad move.

Do Your Research

Obviously, be wary of scams, or of lenders who promise loan approvals within hours, if not days. Consult the Better Business Bureau (look for information about complaints made about unfair terms or hidden costs) or talk to your local SBA Office if you aren’t sure of a lender’s credibility.

Review, Review, Review

Avoid surprises by taking the time to read all your loan-related documents in their entirety as early as you can. Ask your lender if you can see an example of the loan agreement, even before you’ve submitted your loan application.

Prepare Questions

Before you sign anything, prepare a list of questions so that you have a clear understanding of the terms. For example, even if you don’t think you’ll ever be likely to make a late payment or pay off the loan early, familiarize yourself with the policy.

Got questions about the loan application or approvals process? Post them in the SBA Loans & Grants Discussion Thread.

Useful Resources

• SBA Loan Application Checklist – Guides you through the forms and documents you need to collate and complete when applying for an SBA loan program.
• Business Loan Application Checklist (Non-SBA) – Explains the typical items you will need to support a business loan application.
• SBA Loans and Grants Search Tool
• Small Business Lending is Improving: Tips for Finding and Securing the Right Loan

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley