Contract review guide
Business Loan Agreement review: what to check before you sign
Loan agreements are asymmetric by nature, because the lender writes them. Your job is to understand exactly what triggers default, what you have pledged, and what the loan truly costs.
Typical signers: founders and small-business owners taking on debt.
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Analyze my loan agreementThe 5 most common Loan agreement red flags
1. Confession of judgment
Some agreements let the lender obtain a judgment without a lawsuit the moment they claim default. Avoid entirely where possible.
2. Cross-default clauses
Defaulting on any other obligation, even a small one, can trigger default here, making all debt due at once.
3. Blanket liens and personal guarantees
A lien on 'all assets, present and future' plus a personal guarantee means the lender owns your downside completely.
4. Prepayment penalties
Being punished for paying early locks you into the interest schedule. Negotiate free prepayment or a declining fee.
5. Variable rates without caps
Floating rates without a ceiling turn your financing cost into a lottery ticket.
Pre-signing checklist
- True cost calculated (APR including all fees, not the headline rate)?
- Default events specific and cure periods included?
- Collateral limited to defined assets?
- Prepayment allowed without penalty?
- Financial covenants realistic for your projections?
Frequently asked questions
What is a cure period?
A window (often 10-30 days) to fix a default (a late payment, a missed report) before the lender can act. Contracts without cure periods are unforgiving by design.
What does a personal guarantee on a business loan mean?
If the business cannot pay, you pay from personal assets. Limited guarantees (capped amount, specific assets, time-limited) are negotiable alternatives.
What are financial covenants?
Promises about your business's numbers: minimum revenue, maximum debt ratio. Breaching one is a default even if you never miss a payment, so model them against your worst-case projections.
Review other contract types
This guide is general information, not legal advice. Laws differ per jurisdiction for high-stakes contracts, consult a qualified lawyer.
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