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Business Loan Agreements: What to Know Before Signing

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If this is your first time taking out a business loan, you might not know what to look for when it comes to the terms of your loan and the basics that it should include. There are a few things you should look for in your business loan agreement that you need to confirm before doing anything else.

In an ideal situation, you’d have a lawyer to help you go through the agreement; but if not, don’t worry. You will just have to be that much more careful about making sure you’re aware of what’s in the business loan agreement that you’re about to sign. While we certainly can’t replace a lawyer and cannot give legal advice, we can help you be as educated as possible when it comes to understanding your loan agreement.

What is a business loan agreement?

A business loan agreement is a document that holds all of the logistical details of business debt that a borrower is about to take on.  Reviewing your business loan agreement before signing on the dotted line is an absolute must. Otherwise, you’re taking on a business loan with terms that you aren’t even aware of.

This is far from an exhaustive guide–and every business loan agreement will have different features to look out for–but what follows are some of the most important things to look out for. We’ll go into each one in more detail below.

What does a business loan agreement include?

If this is your first time taking out a business loan, you might not know what to look for when it comes to the terms of your loan and the basics that it should include. There are a few things you should look for in your business loan agreement that you need to confirm before doing anything else.

1. Loan amount

For starters, you’re going to need to confirm that you’re signing on to borrow the business loan amount that you think you’re agreeing to borrow. Although it’s unlikely that your business loan agreement will have a different loan amount than previously discussed, this should be your first point of reference when reviewing it.

2. APR

Once you’ve checked out the loan amount, the next thing for you to do is check on the loan’s APR. The loan’s APR will measure how much it will cost you every year that you’ll be repaying it, interest and fees included.

Your loan’s APR should be your point of reference for beginning to grasp how much your business loan will end up costing you. It’s actually a more accurate measure for determining your loan’s cost than the interest rate. Even a decimal of difference in your loan’s APR could end up changing your loan’s cost drastically. Sometimes a business loan agreement won’t explicitly state your APR. Instead, you could be quoted an interest rate or a factor rate, which you should then convert to APR to understand the true cost of capital.

3. Repayment term

Now that you know your APR and the loan amount, check on the length of your loan’s repayment term. This will influence how much your loan will end up costing and how much your regular payments will be.

4. Total loan cost

The last fundamental to confirm should check out if the first three did, but your total loan cost is certainly worth triple-checking. The total cost of your loan should be a result of your loan amount, your loan’s interest rate, and your loan repayment term length.

5. Prepayment penalty

In addition to the basics we covered above, there’s more you’ll want to check out before signing a loan agreement. You should check if your loan comes with a prepayment penalty, which you would have to pay if you pay off your loan ahead of schedule.

Though it might feel like an arbitrary punishment for being financially responsible, a prepayment penalty compensates for the lost value that the lender might suffer due to your avoiding interest by paying off your loan early.

Not all loans come with prepayment penalties; but if they do, it’s crucial to know before you sign on.

6. Penalty fees

“Penalty fees” is a blanket term that can change in meaning from one business loan agreement to another. Penalty fees come in different amounts and apply to anything a particular lender defines as a penalty. This could be any action that breaches the terms outlined in your business loan agreement, like a late payment.

Be sure to check in on how your potential lender defines “penalty” in your business loan agreement, and then see how much you’ll be charged if one of these penalties occurs.

7. Definitions of default

This is one detail that you will definitely need to verify. Generally speaking, defaulting on a loan just means not paying it back as determined by the business loan agreement.

However, a lender can take this as literally or as loosely as they deem appropriate. For instance, not all business lenders will claim you’ve defaulted on your loan if you’ve missed one or two payments. On the other hand, some lenders will take a single missed payment very seriously.

If you “default,” then your lender can technically pursue legal action against you and collect on what they’re owed. With so much potentially at stake, be sure you understand how your lender defines “default” in your business loan agreement.

8. Type of interest rate

Whether it’s fixed interest or variable interest, your business loan agreement should delineate the details of what type of interest rate you’re agreeing to. Plus, if it’s variable interest, the business loan agreement should go into further detail about when exactly the rate will change.

Remember, your interest rate does not capture the full amount your loan will cost you. It’s crucial to go beyond the interest rate and calculate your APR to understand the true cost of borrowing.

9. Late payment fees

Next, you’re going to need to check on what late payment fees your lender will be charging you if you make a payment behind schedule.

Plus, you should see if your lender allows for any grace period for loan payments and, if so, how long it is. These are all questions that your business loan agreement should answer concretely and definitively.

10. Payment schedule

To make sure you never miss a payment, check on the payment schedule and be sure it’s what you agreed to when negotiating the loan in the first place. Whether your payments are daily, weekly, monthly, or otherwise will determine how quickly you pay off your loan and how expensive it will end up being. The schedule of your payments determines how much each payment will be.

To state the obvious, being certain about your payment schedule will allow you to avoid any late fees or penalties as well.

Business loan agreements: Terms to know

Most of the words and phrases in your business loan agreement will have incredibly specific meanings. While you might think you have a general idea of what the acronyms and phrases mean, it’s important that you have a firm grasp on all the loan terminology so that you know exactly what you’re getting yourself into.

Though this list won’t cover every single word you might come across in your business loan agreement’s fine print, it includes the definitions of many common loan terms that could potentially throw you off and even end up costing you.

ACH

Also known as “Automatic Clearinghouse,” ACH is a form of loan repayment that draws your loan payments, whether they be daily, weekly, or monthly, directly from your business’s bank account.

Amortization

“Loan amortization” refers to the way in which loan repayments are structured. If your loan amortizes, you’ll repay your loan through equal, scheduled repayments that are most often on a monthly basis.

Though these payments will always be equal in value, they will include different parts of interest and principal repayment with each payment you make.

What does that mean, exactly? It just means that, as you continue to pay your monthly loan payments, they’ll be the same amount, but that amount will be paying back less and less interest and paying back the principal debt more and more.

APR

Annual percentage rate, most often referred to as “APR,” is a way to indicate how expensive borrowing money will be. APR is denoted in a percentage that indicates how much a loan will actually cost you every year for the term of the loan.

Balloon payment

A balloon payment is when you pay off the principal debt that you owe in one huge lump sum at the end of the life of the loan. Throughout the life of the loan, if you have a balloon payment, your regular payments will only cover the cost of the loan’s interest.

Blanket lien

A blanket lien gives the lender a right to all of the borrower’s assets if the borrower defaults on a loan. Essentially, a blanket lien means that if you default on your loan, your lender could seize your property until the value of the loan is made up for.

Co-signer

If you have a co-signer for a loan, your co-signer will have to pay off the loan if you aren’t able to. Think carefully before you ask someone to co-sign or you agree to co-sign.

Curtailment

“Curtailment” essentially means “paying more for your loan than your pre-planned loan payment.” If you perform a partial curtailment, you’re able to pay more toward your loan than you expected, but you don’t pay your loan off in full. A full curtailment, on the other hand, means you pay off your loan in full.

Default

To default on a loan means you don’t pay the loan back according to the loan’s agreement. If you default on a loan that you legally agreed to, the lender can take legal action against you and your business or if you have a co-signer, they could also be on the hook.

Deferred payment loan

A deferred payment loan is when the borrower and the lender arrange an agreement that allows the borrower to begin payments at a specific time in the future rather than immediately.

Factor rate

A factor rate is how a merchant cash advance or sometimes how a short-term loan is paid back. Typically expressed as decimals, factor rates will let you know how much you’ll need to repay in total. For instance, if your loan amount is $100,000 and your factor rate is 1.18, you’ll be repaying $118,000 in total.

Interest-only payment loan

The interest-only payment loan is an alternative to the traditional amortizing loan. Throughout the loan’s life, your regular payment will just be a decided-upon portion of the interest that your loan will acquire.

At the end of an interest-only loan, borrowers will either pay the principal sum off in full or refinance it with another loan.

LTV ratio

Standing for “loan-to-value ratio,” a loan’s LTV ratio denotes how much of the value of an asset a loan will cover. This will be particularly pertinent to business owners securing equipment financing or commercial real estate loans because they will need to know how much of what they want to buy with the loan will be covered by the loan.

Loan underwriting

“Loan underwriting” essentially means the process that a lender goes through to assess how much of a risk a particular borrower is. The underwriting process will determine both if you qualify for the loan and under what loan terms you qualify.

Prepayment penalty

This is an important phrase to look out for in your business loan agreement—if your business loan has a prepayment penalty, you’ll still have to pay interest, even if you pay the loan off early.

Essentially, when you schedule your payments for a loan, you’re promising the lender a specific amount of value in interest that they’ll earn. If you pay your loan back early, the lender will get cut off from the interest that you would have left to pay. That’s why many lenders attach prepayment penalties to their business loan agreements.

Principal

Principal basically means the amount you borrowed, not including interest. If you borrowed $100,000 for your business, then your principal is $100,000.

Refinancing

Refinancing debt is the act of paying off one loan with another one. Borrowers can refinance loans with other loans that offer better terms.

Servicing

Loan servicing refers to the day-to-day of handling a loan. Payment disbursement, record maintaining, collections, and following up on delinquencies all fall under the term “loan servicing.”

Business loan agreement red flags

If in going through your loan agreement, you’re having some second thoughts about the lender, that’s an important feeling to consider. Red flags can be spotted in even the smallest of details, especially when it comes to business loans.

Before you sign that business loan agreement, let’s go over some worst-case-scenario warning signs that you might be about to sign on to a questionable loan:

Requesting money up front

If your lender is requesting you to pay money up front, this could be a sign of an untrustworthy lender. Even if they cite a specific purpose for the payment—be it a credit check, an application fee, or a brokering fee—a request for a one-off, up-front payment is a sign of shady practices.

Guaranteeing your approval

If your lender guaranteed you a loan before even seeing your business’s credentials, you could be dealing with a questionable lender. If your direct point of contact with this lender was a guaranteed offer, then you might be on the verge of signing onto a loan scam.

High-pressure sales tactics

Did you feel pressured into pursuing this loan? You might have gotten this far in the process simply because you felt like you couldn’t say no.  Take a moment or two to consider whether you’re really ready to take on debt with the terms laid out by the business loan agreement. If not, simply don’t sign.

Terms too good to be true

Lastly, if you’re signing a business loan agreement that delineates terms that are just too good to be true, then, unfortunately, they probably are.

Be sure to compare the business loan agreement terms to other offers to see if any are comparable. If the terms of the business loan agreement that you’re about to sign are in a league of their own, then you should probably double down on verifying the credibility of your lender before signing.

Frequently asked questions

What is a business loan agreement?

A business loan agreement is a document that contains all of the details regarding the debt that a business is going to take on from a lender—including the amount, terms, interest rate, and more.

The business loan agreement is signed by both parties—and in doing so, the lender is agreeing to lend money, and the borrower is agreeing to pay that money back.

What’s the difference between a business loan agreement and promissory note?

Although promissory notes and business loan agreements are similar, business loan agreements are typically more detailed and require the signature of both the borrower and the lender—whereas promissory notes usually only require the signature of the borrower.

In other words, a promissory note is a document that spells out your promise to repay a loan—but doesn’t give much more information. A business loan agreement, on the other hand, includes all of the details that are involved in the borrowing contract between you and the lender.

What is included in a loan agreement?

Although it will likely vary based on the type of loan and individual lender, most loan agreements include:

  • Loan amount, interest rate, term length

  • Total cost of the loan

  • Additional fees and prepayment penalties

  • Payment schedule

  • Default policy

  • Effective date

  • Signatures

The bottom line

With all of those steps covered, hopefully, you’re feeling good about the business loan agreement in front of you.

Remember to always consult an expert when making big financial decisions like this; but if you’re eager to take the first steps on your own, this guide can help you do it.

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Banking

Overdraft Protection: What It Is and Different Types

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Overdraft fees can be a major drain on your finances. Some banks charge more than $30 per overdraft and potentially charge that fee multiple times per day if you keep making transactions that overdraw your checking account. If you want to avoid these fees, you can typically opt out of overdraft coverage with your bank. It can be useful, however, to set up overdraft protection instead of opting out so you don’t find yourself unable to pay for something urgent.

What is overdraft protection?

Overdraft protection is a checking account feature that some banks offer as a way to avoid overdraft fees. There are several types of overdraft protection, including overdraft protection transfers, overdraft lines of credit and grace periods to bring your account out of a negative balance. Some other overdraft coverage programs might be a combination of these features.

Before you opt out of overdraft protection altogether — which means your bank will decline any transaction that would result in an overdraft — consider how you might need overdraft coverage in an emergency. For example, maybe you’re using your debit card to pay for gas on a road trip. You need enough fuel to get home but don’t have enough money in your checking account. Instead of dealing with running out of gas, you may want to deal with an overdraft.

How does overdraft protection work?

Here are more details about the main types of overdraft protection that banks tend to provide.

Overdraft protection transfers. When a bank allows you to make an overdraft protection transfer, you can link a savings account, money market account or a second checking account at the same bank to your main checking account. If you overdraft your checking, your bank will take the overdrawn funds from your linked account to cover the cost of the transaction. Many banks allow this service for free, but some banks charge a fee.

Overdraft lines of credit. An overdraft line of credit functions like a credit card — but without the card. If you don’t have enough money in your account to cover a transaction, your bank will tap your overdraft line of credit to cover the remainder of the transaction. Lines of credit often come with steep annual interest rates that are broken up into smaller interest charges that you keep paying until the overdraft is paid back. Be aware that a line of credit could end up being expensive if you use this option to cover your overdrafts.

Grace periods. Some banks offer grace periods, so instead of immediately charging an overdraft fee, the bank will give you some time — typically a day or two — to return to a positive account balance after overdrafting. If you don’t do so within that time frame, your bank will charge you fees on any transactions that overdrafted your account.

Other coverage programs. Some banks are taking a new approach to overdraft protection by offering what’s basically a free line of credit with a longer grace period for customers to bring their account to a positive balance. One example, Chime’s SpotMe® program, allows customers to overdraft up to $200 with no fees. The customer’s next deposit is applied to their negative balance, and once the negative balance is repaid, customers can give Chime an optional tip to help keep the service “free.”

Chime says: “Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Eligibility requirements and overdraft limits apply. SpotMe won’t cover non-debit card purchases, including ATM withdrawals, ACH transfers, Pay Friends transfers or Chime Checkbook transactions.”

4 ways to avoid overdraft fees

  1. Set up low balance alerts. Many banks offer an alert option so you’ll get a text, email or push notification if your account drops below a certain threshold. These alerts can help you be more mindful about your balance so that you can put more money into your account or spend less to avoid an overdraft.

  2. Opt out of overdraft coverage. If your bank doesn’t offer overdraft protection — or if its only options cost money — you may want to opt out of overdraft coverage, in which case your bank will decline any transactions that would bring your account into the negative. Keep in mind that this option could put you in a sticky situation if you’re in an emergency and can’t make an important purchase because you don’t have overdraft coverage.

  3. Look for a bank that has a more generous overdraft policy. Many banks are reducing or eliminating their overdraft fees, so if overdrafts are an issue for you, do some comparison shopping to see if there are better options available.

  4. Consider getting a prepaid debit card. Prepaid debit cards are similar to gift cards in that you can put a set amount of money on the card, and once you run out, you can load it with more money. The prepaid debit card can’t be overdrawn because there isn’t any additional money to draw from once its balance has been spent.

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Business Ideas

Startup Business Grants: Best Options and Alternative Funding Sources

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Startup business grants can help small businesses grow without debt. But if you want free money to start a company, your time may be better spent elsewhere. Competition for small-business grants is fierce, and many awards require time in business — often at least six months.

Some grants are open to newer businesses or true startups. And even if you don’t qualify now, it can pay to know where to look for future funding. Here are the best grants for small-business startups, plus alternative sources of startup funding to consider.

How Much Do You Need?

with Fundera by NerdWallet

Government startup business grants and resources

Some government programs offer direct funding to startups looking for business grants, but those that don’t may point you in the right direction or help with applications:

Grants.gov. Government agencies routinely post new grant opportunities on this centralized database. If you see an opportunity relevant to your business idea, you can check if startups are eligible. Many of these grants deal with scientific or pharmaceutical research, though, so they may not be relevant to Main Street businesses.

Local governments. Lots of federal grants award funding to other governments, like states or cities, or to nonprofit economic development organizations. Those entities then offer grants to local businesses. Plugging into your local startup ecosystem can help you stay on top of these opportunities.

Small Business Development Centers. These resource centers funded by the Small Business Administration offer business coaching, education, technical support and networking opportunities. They may also be able to help you apply for small-business grants, develop a business plan and level up your business in other ways.

Minority Business Development Agency Centers. The MBDA, which is part of the U.S. Department of Commerce, operates small-business support centers similar to SBDCs. The MBDA doesn’t give grants to businesses directly, but these centers can connect you with grant organizations, help you prepare applications and secure other types of business financing.

Local startup business grants

Some local business incubators or accelerators offer business grants or pitch competitions with cash prizes. To find these institutions near you, do an online search for “Your City business incubator.”

Even if you don’t see a grant program, sign up for their email newsletter or follow them on social media. Like SBDCs and MBDAs, business incubators often provide business coaching, courses and lectures that can help you develop your business idea.

Startup business grants from companies and nonprofits

Lots of corporations and large nonprofits, like the U.S. Chamber of Commerce, organize grant competitions. Some national opportunities include:

iFundWomen. iFundWomen partners with other corporations to administer business grants. You can fill out a universal application to receive automatic notifications when you’re eligible to apply for a grant.

Amber Grant for Women. WomensNet gives two $10,000 Amber Grants each month and two $25,000 grants annually. Filling out one application makes you eligible for all Amber Grants. To qualify, businesses must be at lesat 50% women-owned and based in the U.S. or Canada.

National Association for the Self-Employed. Join NASE, and you can apply for quarterly Growth Grant opportunities. There are no time-in-business requirements for these grants of up to $4,000, but you’ll need to provide details about how you plan to use the grant and how it will help your business grow.

FedEx Small Business Grant Contest. This annual competition awards grants to small-business owners in a variety of industries. You can sign up to receive an email when each application period opens. To be eligible, you’ll need to have been selling your product or service for at least six months. Be mindful, though, that each grant cycle receives thousands of applications.

Fast Break for Small Business. This grant program is funded by LegalZoom, the NBA, WNBA and NBA G League and administered by Accion Opportunity Fund. You can win a $10,000 business grant plus free LegalZoom services. Applications open during the NBA season, which runs from fall to early summer each year.

Alternative funding sources for startups

New businesses likely won’t be able to rely on startup business grants for working capital. The following financing sources may help accelerate your growth or get your startup off the ground:

SBA microloans

SBA microloans offer up to $50,000 to help your business launch or expand. The average microloan is around $13,000, according to the SBA.

The SBA issues microloans through intermediary lenders, usually nonprofit financial institutions and economic development organizations, all of which have different requirements. You can use the SBA’s website to find a lender in your state.

Friends and family

Asking friends and family to invest in your business may seem daunting, but it’s very common. Make sure you define whether each person’s money is a loan and, if so, when and how you’ll pay it back. Put an agreement in writing if possible.

Business credit cards

Business credit cards can help you manage startup expenses while your cash flow is still unsteady. You can qualify for a business credit card with your personal credit score and some general information about your business, like your business name and industry.

You’ll probably need to sign a personal guarantee, though, which is a promise that you’ll pay back the debt if your business can’t.

Crowdfunding

If your business has a dedicated customer base, they can help fund you via crowdfunding. Usually businesses offer something in exchange, like debt notes, equity shares or access to an exclusive event.

There are lots of different crowdfunding platforms that offer different terms, so look around to find the model that works best for you.

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Finance & Accounting

Why Is Crypto Down?

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For crypto investors, any given day can feel like a roller coaster ride. The price of Bitcoin, for instance, regularly goes up or down by more than 5% in a day. In contrast, stock indices like the S&P 500 or Dow Jones Industrial Average rarely see swings that large.

During a bad turn for digital assets, it’s natural to wonder what caused the price drop — and what you can learn from it. Of course, each day on the market may bring a different answer for why crypto is down (or up), but understanding the basic mechanics behind crypto’s volatility can help you make better decisions.

Here are some of the many possible reasons behind big drops in prices:

  • Low liquidity. If a cryptocurrency is trading at lower-than-usual volumes, weird things can happen, like a single large trade throwing off the market by swinging prices closer to the value of that transaction.

  • Speculative trading dries up. High-risk trading with hopes of quick returns can end badly when momentum wanes.

  • Loss of trust. Trust in a product is a price driver. If it evaporates, prices can, too. In addition, because crypto is a novel asset class based on relatively new technology, signs of trouble such as cyberattacks or product failures can adversely affect the overall market.

Whatever the reason behind the crypto price trends of a single day, it’s important to remember that volatility has been a defining part of crypto investing.

Even Bitcoin.org, the website started by Satoshi Nakamoto to help explain Bitcoin, doesn’t shy away from that fact when it states: “relatively small events, trades, or business activities can significantly affect the price.”

Making sense of the bigger picture

In addition to dropping a lot in one day, cryptocurrencies are vulnerable to macroeconomic factors that can push down values for weeks or months.

In November 2021, a price decline turned into a sustained nosedive that continued until midway through 2022, when prices stabilized far below their lofty former highs.

Crypto’s drop coincided with price declines in many asset classes, but the declines in crypto were far steeper. For example, the S&P 500 dropped around 25% but has clawed back about half of those losses. Meanwhile, Bitcoin is still worth less than half of what it was before Thanksgiving 2021.

When explaining crypto’s drop, sometimes called “crypto winter,” experts point to the same root cause: Investors were looking to offload risky assets of all types amid economic uncertainty.

Adam Grealish, director of investment solutions and GM of advisory at Altruist, a software platform for financial advisors, said the scale of these big declines in crypto prices undercuts “the story about it being digital gold and a place where folks are moving to protect wealth.”

“While there’s an interesting theoretical argument for it, empirically it trades much more like a risky, high-volatility asset,” Grealish said.

The macroeconomic environment in 2022 hasn’t been kind to risky assets.

Red-hot inflation has driven prices up. In response, the Federal Reserve raised rates, which lifted the interest charged for all types of loans. When money is more expensive, stocks and other assets can suffer. As a result, investors tend to flee riskier investments, including crypto.

While this is bad news for investors and customers alike, Greg King, founder and CEO of crypto investment firm Osprey Funds, says this is part of an evolutionary process that will improve the industry in the long run.

“Our view is that it’s a positive in cleaning out some of the dead wood there,” he says. “All of the companies that went under that were in the press were centralized operations with poor risk management.”

It’s impossible to know what course the crypto market could take from here.

If interest in cryptocurrency investing recovers to the levels seen in 2021, that could benefit people willing to weather the tough times. But don’t confuse a volatile asset for a basketball; only with the latter can you expect a bounce back because it fell. Volatility means that prices could still go in either direction.

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