Los Angeles Business Loan Contracts Lawyer

Understanding California Business Loan Contracts

When obtaining a loan from a bank or major institution, they often require specific loan documents. In more intricate dealings with these lenders, or when dealing with an individual or smaller lender, it’s advisable to have customized loan documents prepared by a lawyer. Typically, the borrower covers the attorneys’ fees in these situations.

Basic Business Loan Provisions

The fundamental components of any business loan agreement typically encompass:

1. An agreement detailing the lending and borrowing of money, either for a fixed period or as a revolving credit line.
2. Conditions precedent that the borrower must meet before receiving the loaned funds.
3. Representations and warranties made by the borrower.
4. Affirmative and negative covenants from the borrower, covering aspects like collateral, fund utilization, and legal compliance.
5. Provisions for enforcing the agreement in case of borrower default on the loan.

Secured Loans

When a borrower pledges collateral to secure a loan, the loan agreement should include a security clause. This clause allows the lender to take ownership of the collateral if the borrower fails to repay the loan. The security clause must, at a minimum:

1. Give the lender a security interest in the collateral;
2. Specify the obligations secured by the collateral; and
3. Clearly identify the collateral.

To be valid, the borrower must sign the security agreement or contract that includes the security clause.

Guaranty Agreements

A loan guaranty enables a lender to reclaim a business loan from individuals or businesses that have guaranteed the loan for someone else. These agreements are often required from shareholders or owners seeking loans for inexperienced businesses or those with poor credit. Loan guaranties can stand alone or be combined with a security agreement. Similar to securing a loan with collateral, they can be documented separately or included in the loan agreement.

Promissory Notes and Other Debt Instruments

Promissory notes typically form just one component of a comprehensive set of business loan documentation. Key details to include in a promissory note are:

1. Identification of the debtor and creditor;
2. The principal amount;
3. The interest rate and its calculation method; and
4. The payment dates for principal and interest, along with the lender’s recourse in case of borrower default on payments.

Sections of a Business Loan Agreement

Most business loan agreements follow a standard structure. Your lender will tailor these sections to match their lending criteria and your specific deal. While there might be slight differences in format or wording across loan contracts, you’ll usually encounter the following:

• Effective date – This marks the point when the loan agreement is legally binding. Oftentimes, it coincides with the day your small-business lender disburses your funds.
• Parties and loan amount – This section includes essential details about you and your lender, such as names, addresses, phone numbers, and the borrowed amount.
• Promissory note – The promissory note signifies your commitment to repay the loan as per the terms specified in the agreement.
• Collateral – If you’ve used collateral to secure your loan, it will be detailed here. Collateral can range from real estate to equipment, inventory, or other business assets. Traditional lenders such as banks and credit unions often request collateral, unlike online lenders.
• Terms and conditions – This section provides essential information regarding your business loan and repayment terms, including loan amount, duration, repayment schedule, interest rate, and associated fees. Additionally, it outlines your lender’s policy on prepayment. While some lenders permit early repayment without fees (and may even provide discounts), others impose penalties for settling the loan ahead of schedule.
• Penalties for nonpayment – This section of the loan agreement details the consequences of missing a payment. Your lender might impose a late fee or provide a grace period allowing you to submit a late payment without incurring penalties.
• Defaults and acceleration clause – This section details the consequences of being unable to repay your loan and going into default. It may cover details about fees, solutions, and acceleration. An acceleration clause typically specifies that upon default, the lender can demand immediate payment of the outstanding loan amount.
• Jurisdiction and governing law – As laws differ across states, this section clarifies which state’s laws govern the agreement. It also specifies the jurisdiction to resolve any court disputes arising from the loan agreement.
• Borrower representations – Within this segment, as the borrower, you affirm specific details to the lender. This includes validating your legal capacity to conduct business in the state, your authorization to sign the business loan contract, and the precision of your financial records.
• Covenants – A covenant represents a mutual agreement between two parties. In this scenario, the lender commits to offering you a defined sum of funds, while you undertake to repay them in accordance with the conditions outlined in the loan agreement. As part of your business loan contract, additional covenants may be required, including:
  • Maintaining certain types of business insurance.
  • Using the loan proceeds as set out in the agreement.
  • Not taking on additional debt.
  • Remaining up to date on tax payments.
  • Keeping financial records and providing them to the lender as necessary.
  • Not changing the name, location, or ownership of the business.
• Miscellaneous – Upon reaching the conclusion of your business loan agreement, you may encounter a miscellaneous section housing supplementary details tailored to your lender’s procedures. Within this segment, you might find information regarding the method of receiving loan notifications, the protocol for altering or revising the contract terms, and even a clause pertaining to waiving the right to a jury trial, among other pertinent details.
• Signatures – The final part of a business loan contract is the signing stage. This section usually includes spaces for your signature (as the borrower), any other business owners or guarantors, and the lender. The agreement takes effect on the specified date in this section.