From time to time, businesses throughout Massachusetts need to borrow money. Whether it is for the costs of starting up the business, expanding, or covering business expenses, getting a source of credit can lead to the loan that you need.
However, completing a credit application and signing a credit agreement is not as simple as it sounds. If a mistake is made, it can saddle your business with financial obligations that can cripple or even doom its future.
Nuanced Differences in Credit Offerings
Businesses that need a loan or an injection of funding to complete a project, meet an obligation, or expand are frequently faced with numerous different options.
While those options may appear identical or at least very similar, the differences between them is frequently very significant. Some of the most common differences in credit offerings include:
- Prepayment penalties, where businesses have to pay extra in order to pay down the loan, earlier
- Balloon payments, which allow for lower monthly payments, but at the cost of a large final payment several years down the line
- Secured credit, where the business getting the loan puts up some of its assets as collateral to secure the loan, and which can be possessed by the creditor if the business falls behind its payments
These and other loan terms can drastically alter the repayment of a particular loan and change how risky the loan is, over the long term.
For example, secured credit offerings will generally have a lower interest rate, which can be very enticing to business owners that want to save money over the course of the loan. That lower rate, however, is because the lender is less concerned about nonpayment because it can simply take possession of the collateral to cover its losses. Because of this, secured credit offerings present a completely different kind of risk than unsecured credit.
These different types of risk will depend on a business' interests, needs, financial well-being, and its long-term plans. Discussing your options with a lawyer who knows the risks of different credit offerings and how they can impact your business in the future can help you make the best decision for your given situation.
The Business Credit Application Stage
Business loans, especially those over a few thousand dollars, come with extensive contract preparation and review as the lender performs its due diligence. While a lender's due diligence sounds like it only creates work for them, as the borrower, you will have to assemble numerous documents to put together in your credit application. Falsifying any of these documents can amount to fraud – even if the misleading information was just a mistake.
The credit application is not just a stage where mistakes can be made, though: There are several things that businesses can do in their application that actually improve the terms of the business loan that they stand to receive. This can save thousands of dollars over the course of the loan. Some of the most common ways to do this are:
- Providing proof of your business' strong financial state
- Including a business plan, even if the application does not require it
- Building your business and personal credit score as much as possible before applying for business credit
- Supplying trade references
By providing more detail about your business' financial health, rather than less, it can convince business credit providers that you are low-risk and deserve better loan terms.
The Credit Agreement
Credit applications that get accepted lead eventually to the credit agreement. This is the document that outlines the line of credit and how the business receiving the funds will have to repay them. It includes all of the terms of the loan. Obviously, the terms in the credit agreement should match the terms of the loan that you had applied for, when you submitted the application.
The credit agreement is a binding contract, and will govern how the credit is disbursed, as well as how and when the installment payments are to be made.
Breaching the Credit Agreement and the Collections Process
In the best of cases, the business receiving the credit uses it to help its operations and then makes the incremental payments required under the terms of the agreement until both the principal and the interest is completely paid off.
Sometimes, though, the terms of the credit agreement prove to be too onerous and the business falls behind in its payments. A breach of the credit agreement is not a trivial matter – it can trigger a host of fees and send the account into a past due status that, if the payments are not brought up to date, can lead to the lender initiating the commercial collections process.
These are often very trying times for a business, as it struggles to keep up with the payment terms of its loan while protecting its reputation and credit score. However, there are ways that a business can defend itself from financial harm at this stage. In some cases, the terms of the credit agreement were not actually broken. In others, the credit agreement can be renegotiated in ways that end up being in the interest of both the business and the lender.
Massachusetts Business Litigation Lawyers at the Katz Law Group
Securing a source of funding is a huge event for many businesses in Massachusetts, especially for small businesses. For many of them, a business credit application is the first step in a huge and long-awaited development for the company.
However, signing a credit agreement is also a big responsibility – one that covers thousands of dollars and lasts several years. It is often the most important decision that business owners can make.
The business attorneys at the Katz Law Group have more than 35 years of experience representing business owners in Worcester, Framingham, Marlborough, and the rest of Massachusetts. Contact them online or call them at (508) 480-8202 for the help and guidance you need.