I think you’ll agree with me when I say: It’s REALLY hard to procure a loan from most individuals or corporate organizations. Reasons for this are not far fetched— they all want to guarantee repayment and ensure their interest is protected, even from the onset.
When borrowing money, there are small business loan documents required for you to sign. These documents provide your lender with a guarantee that the loan will be repaid. The documents for business loans vary in use and requirements. As a small business owner, you should know what these documents are and their significance towards prospective loans. This knowledge will help you make better loan decisions.
There are different kinds of loan documents required for a loan, each depending on your lender’s preferences. Here are a few of these documents and what your lender seeks to achieve by having you sign them –
- Personal Guarantee Form
- Direct Debit Mandate
- Loan Offer Letter
- Personal Cheque
- Board Resolution
Personal Guarantee Form
The personal guarantee form for loans contains explicit details about your loan agreement. This legal document includes all details about your loan, including, but not limited to, the method and duration of repayment. When signed, it gives your lender a guarantee that his loan would be repaid.
To take a personal guarantee form, you must have a good credit score. In the case that you have bad credit, you can also get a personal guarantee form by presenting someone with a good credit score. Some other things included in the personal guarantee form for loans include stipulated dates of repayments, expected periodical returns, and the penalty for payment defaults.
In the case that you delay or fail to pay back the loan, your guarantor is held responsible and has to pay it. Additional charges may also apply for delay inconveniences. If your guarantor is unable to pay the loan, then your lender can also file a lawsuit in case of a default in payment since it’s a legal document.
Direct Debit Mandate
The direct debit mandate form authorizes your lender to debit you whenever a payment is due. This form is also called a Direct Debit Instruction (DDI). Your lender gives you this document to sign because it bypasses you paying yourself as at when due and, thus, eliminates the possibility of forgetting or defaulting to do so.
To use a direct debit mandate form such as Remita and Cyberpay, you would need to provide personal details such as your account name, account number, bank name, and loan repayment amount. The lender is then fully authorized to withdraw payments ONLY when due. However, you will be notified first before the withdrawals are made.
Your lender definitely wants the freedom that comes with getting back the loan easily and when due. This is the reason why a DDI will be issued for you to sign. You do not need to worry about unwarranted deductions as the document prevents your lender from making unnecessary withdrawals or transfers from your account.
Loan Offer Letter
The primary reason why your lender will present you with a business loan offer letter to sign is that you run a small business. Conventional loans can be difficult for your business to acquire since lending institutions prefer to give to big, established companies. However, a business loan offer letter allows you to take a loan regardless of your current business status. Basically, this means that regardless of whether you’re just starting out or you’ve been in business for some time, you can get a loan.
What requirements are to be met to sign this document? The offer letter warrants that you have a stable and steady income as a guarantee that you’re able to pay back. It also accommodates you if you don’t have such a guarantee but will do within 90 days from the date you receive the loan. This must be shown with credible proof before the agreement can proceed.
The difference between this form of loan and other loans is the method of income verification. All other procedures, rates, and requirements are the same. In verifying your income and your ability to pay back, this loan offer looks at your future income. On the other hand, other loan types consider your past records, income, and credit score. Then, your lender provides you with a loan offer letter to sign, as an opportunity for you to take a loan from a fresh start.
A personal cheque is a document that authorizes a particular amount from your account to whoever you issue the cheque to. This is a lucrative document for your lender, as it will be the direct means by which the loan would be paid back if you fail to pay. The lender would present the cheque to your bank, and the loan amount would be recovered.
This document can only be issued with an agreement based on the personal cheque validity. The cheque is valid for 180 days. This means that the loan procurement and payment have to be within 180 days or less before the cheque bounces. Thus, your lender is within means to activate the cheque and get back the loan if you fail to pay it back.
To make use of a personal cheque while receiving a loan, you have to maintain enough money that covers the periodical loan payment as at when due. Failure to do this could result in a lawsuit filed against you. Once you sign and your lender endorses the withdrawal at the back of the cheque, it automatically serves as a means of paying the loan back.
A Board resolution is legal documentation of your business’ decision to acquire a loan. Your lender wants you to sign this document as a reminder of your commitment to paying back the loan. This document is usually used when a company makes crucial decisions as a means of documentation and accountability.
When your business decides to take a loan, your lender will want you to present a board resolution for loan approval to prove your decision. It provides legal backing for your lender to take appropriate steps if you default in paying back the loan. It also certifies that all the shareholders and stakeholders are aware of the loan and are committed to seeing that it is repaid when due.
Now that you know the significance of these documents and why your lender wants you to sign them, you can practically apply this knowledge when getting a loan for your business. Plan your financial decisions according to these documents’ requirements to obtain the loan and payback when due. You definitely do not want your business in prolonged debt and eventually running bankrupt.
Bear in mind also that defaulting to adhere to your lender’s documents’ agreed terms can result in a lawsuit filed against you. These documents are all legally binding, and your lender can successfully win claims through them on default in loan repayment. You should only take the necessary loans you are capable of paying back in time. This gives you and your business more credibility, which might even help boost your business returns in the long run. So, what are your experiences in getting a loan in the past? Let me hear from you in the comments.