What Is A Loan Agreement

Sept. 13, 2011 - PRLog -- Among the important aspects of loan agreements are default, materiality, negative and positive covenants, warranties, and loan administration. The term "lockbox" is key where loan administration is concerned. There are two possibilities here. First, borrowers may choose to withdraw money from their accounts before default, and no approval will be required. In the other, the lender must give consent. The first option is in most cases preferred.

Speaking of warranty, it is important that borrowers provide certain facts, which are proven to be true. There are two terms for this, the second one being representation. For some, representation refers to a statement that certain fact is true, but there is no real guarantee for this. On the other hand, a warranty has a much greater scope. Here, a statement must be true, regardless of the debtor's knowledge. In addition, a representation does not extend to events in the future. With representation, a producer could not guarantee that his product will function five months after the purchase, while with a warranty he agrees to take certain measures and provide specific services in the event that it does not. In both situations, there is usually a limiting clause, such as 'the best of the borrower's knowledge'. A number of legally confounding situations and loopholes can occur because of this, such as defining what 'knowing' something means.

What do the terms negative and positive covenants refer to? First of all, what is a covenant? A covenant is usually in the form of an agreement to keep from or engage in certain actions. Negative covenants prevent persons from engaging in certain actions while positive covenants serve the opposite purpose. Having insurance is one example of a positive covenant. Most lending institutions have established high insurance requirements. They are often just inserted randomly with no consideration of the specific case in question. This is an important point of a loan agreement.

Another important point of a loan agreement is the financial reporting requirement. What is the extent to which financial reporting is required (http://www.yourloan.ca/loan-articles/)? The least strict requirement is that of a compilation. In this case, all the accountant does is present the borrower's financial information as a financial statement. Reviews are relatively more common. With reviews, accountants make some inquiries into the financial situation of borrowers, even if they are startups or companies.

In addition, a business loan agreement (http://www.yourloan.ca/small-business-loans--credit/) should contain acceleration and penalty clauses, a default clause, and a repayment clause. Accelaration should be defined in the agreement, denoting the loan balance that the creditor is allowed to make due immediately, even if the original due or maturity date has been set in the future. Secondly, there should be a clause that allows borrowers to pay back in full or in part, if they want to return the money faster. Finally, there are certain default provisions, such as late payments, multiple late payments, declaring bankruptcy, etc. A loan agreement should define what is covered under the term default.

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