Things to Know About MSME Loan Agreement

Loan agreements are often long and seem very tedious to read, but they are of the utmost importance. An MSME loan agreement should not be taken lightly and should be given the attention it deserves. The loan agreement could easily be considered the most important document when it comes to a loan of different types.

The document usually contains all the details of the business agreement and should be read with extreme patience and importance. There could be many covenants attached to a certain loan and the details of these are present in the loan agreements. There are many reasons why people should take loan agreements very seriously. In this article, we will take a brief look at MSME loan agreements.

Things to know about the MSME Loan Agreement:

· Annual percentage rate:

The annual percentage rate of charge or APR is mentioned in the loan agreement. This is one of the most important things that can be found when looking at the loan agreement. The annual percentage rate determines the amount of interest your bank or NBFC will charge each year.

This information is critical and can often be overlooked. Being clear about the annual percentage rate would enable the borrower to be ready to pay the amount with the particular interest rates.

· Security blanket:

The borrower is requested to provide a security cover for his loan to the lender which in this case is the bank or the NBFC. When requesting a MSME loan you would be asked to sign a guarantee against the loan. This security can take the form of assets or even a personal guarantee. Financial institutions can sometimes ask for additional guarantees if the ones you have offered do not match the loan amount in market value.

Providing security is a big challenge when opting for an MSME loan. Moreover, if individuals opt for an unsecured loan, the interest rate becomes extremely high. In such loans, you do not have to provide collateral, but rather pay a much higher rate of interest to the bank or NBFC.

· Early repayment clause:

Your loan agreement contains a variety of clauses and, by reading it, you can read each one of them. A prepayment clause is a condition in which you repay the full amount of the loan before the due date. In such cases, the borrower can often be charged a penalty.

It is important to go through your loan agreement and modify the prepayment clause if necessary, especially if you plan to repay the loan before the set date.

· Penalties:

Penalties would exist in your loan agreement and kick in if you miss payments to the bank. The bank decides on a certain amount which would be charged as a penalty if the borrower is unable to pay the fixed amount to the bank in a timely manner.

This lump sum is decided and mentioned in the loan agreement. Making sure you are aware of the penalty charges in the loan agreement will allow you to be stricter with your payment schedule and never miss one because you would be subject to a penalty.

· Interest rates for loans to MSMEs:

The most important factor to consider is the interest rate that will be charged by the bank. Each loan has a different interest rate and therefore it is extremely important to know the interest rates for your MSME loans.

The interest rate should not be too high and should be manageable for the borrower, your loan interest rate and all the details about it will be in your loan agreement document. What is important to remember is not to be mistaken when people show you the interest rates on a monthly basis, in this situation it is advisable to go to the bank and ask for the annual rates.

· Prepayment and partial payment:

Policies regarding prepayment and partial payment may be different at each bank and so it is important to be aware of this. Details of both can usually be found in your loan agreement document. Sometimes a certain bank may only offer a certain facility while some of them may offer both. Being clear about the bank’s policies would make you feel more comfortable.

Final preview

Loan agreements are the most important documents when it comes to loans. These documents contain all the details of the trade agreement. When the borrower is up to date with the terms of the loan agreement, the chances of the loan process going smoothly are much higher.

There are many clauses in loan contracts that can often take you by surprise and require you to pay a penalty to the bank. It is advisable to read the loan agreement document carefully before signing it.

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