Borrowing and lending money has legal implications on both parties in the business transaction. On the one hand, the borrower needs to repay within stipulated timelines.
On the other hand, the lender also needs to go by the agreed terms and conditions. For instance, he or she has no power to demand an earlier payment than the one accepted. Conversely, they have no right to raise the interest rates unless the contract permits him or her to do so.
Thus, this article outlines all the legal and financial implications of taking out loans and credit for your business.
Risk and return
The inability to repay credit is one of the most potent risks. The consequences of not being able to pay back the loan are better imagined than experienced. For starters, you stand the chance of being bankrupt and even if not; you may fall into a credit hole.
The biggest challenge that often leads to all this is the interest rate. As days go by after you have defaulted the payment, the credit gains interest.
The riskiest types of loans are those with adjustable rates. This is because monthly payments may change unexpectedly. This is why many consider fixed-rate loans. However, for the latter, the pain of footing higher costs than what you took initially is also overwhelming.
Distinct lending laws
The moment you sign up for a bank loan, you have entered into a legal contract. You have the responsibility of letting your lender know of any changes as they happen. For instance, when you move out of your home or have a significant difference in your income. You are also supposed to adhere to the repayment schedule as agreed.
Luckily, the borrower has several laws protecting him or her. For example, under the Administration of Justice Act, debt collectors cannot harass you into paying your debts.
No sane lender gives you money free – interest rates apply to all. However, there may be other additional and hidden fees surrounding loans and credits, aside from the interest rates. For instance, here are some of the costs you expect to foot when taking a loan:
- Non-financial charges
These types of expenses come out of high borrowing. If you have a high credit utilisation, creditors are likely to give you a lower credit score. This can bring in problems with credit check-related activities. For example, you may find it challenging to get housing.
Some of the costs you can expect to cater to include processing fees, late payment fees, and even origination fees, which you pay just for taking the loan.
This caters for the majority of costs related to taking a loan. Some lenders have adjustable-rate loans, which you should be very careful. Such investments will have the monthly payment amount linked with circumstances beyond your control. This is precisely the interbank rate.
Short and long-term consequences
There is a satisfaction of having a loan. You get to cover the activities you had in plan and gain whatever you wished. However, all of these come at a considerable cost; you will have to bare ultimately.
One notably long-term implication of taking a loan is the interest rate. This is especially true when your repayments take time to start. This means that the interest rate is slowly building up, and the accumulated percentage goes to the end of the deferment period.
On the other hand, when a borrower dedicatedly pays the loan regularly and thoroughly, then he or she builds a good credit score. Moreover, if you take a loan for your business and it grows in the right direction with profits and increased cash flow, you will easily handle the loan repayment.
These are placeholders for credits and loans. Banks lend startups money to grow. However, your business may have to provide hard assets that will stand in for the loan. This is to help the bank reduce its risk of lending.
Different lenders have unique needs when it comes to the types of collaterals they accept. You need to be careful and confident with the asset you give as collateral. Because, if you fail to pay back the loan, the bank has every right to confiscate the asset you provided.
Agreement on future ratios
Some lenders may need you to sign loan covenants. The company, in this case, will agree on keeping some basal rates to equity. This means that if your financial levels go way below the standard ones, you will have technically defaulted on the loan.
Personal financial details
Getting a loan for your business may require you to surrender most of your credentials, including but not limited to net worth, social security numbers, asset details, and liabilities such as vehicles, houses, credit card accounts, mortgages, and even investment accounts.
The catch is that you might probably have to sign a personal guarantee at the end. Therefore, do not be shocked.
Business financial details
Banks, in most cases, will need you to provide all financial information relating to your business. Such include complete contact information, tax ID numbers, credit card accounts, investment accounts, bank accounts, and all the current or past debts. They want to know everything about the business.
Final words on taking out loans and credit for your business
In summary, taking a loan for your business may not be that hard. However, the legal and financial implications incurred matter a lot for your business. You need to think clearly whether it is worth the try. If possible, get a financial expert to give you concrete advice. Speak to one of our legal specialists by booking a free, no-strings-attached call here.
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