Contract review guide
Business Loan Agreement review: what to check before you sign
Loan agreements are asymmetric by nature — 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 agreement →The 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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