When you apply for a loan as a Small Business Owner or an SME, reviewing the actual terms of that Loan Agreement is the last thing on your mind. Luck for you, this week we will be discussing 3 of some of these key terms and what you should consider when you come across these terms in the loan agreement.
- On demand repayment or fixed term repayment
You will need to discuss with the lender whether the loan facility is repayable on demand by the lender or on a fixed schedule with periodic repayments. If the loan is payable on demand, this means that the bank can recall the loan at will. Most times, the option elected by the lender is influenced by the borrower’s credit score. For example, where the borrower has a strong credit score, the bank or lender is likely to agree to a fixed schedule with periodic/monthly repayments.
- Events of Default
Normally, the loan agreement will contain an events of default clause if the loan is a fixed term loan. An event of default refers to the occurrence of an event whose net result is that the borrower is considered to be in default under the terms of the loan agreement. Examples would include non-payment as per repayment schedule, default under other loan agreements by the same lender.
- Interest and default interest
The interest charged on a loan is simply the price of the loan being advanced. In Kenya, interest rates levied by financial institutions are floating fee rates, which are based on an interest margin added to a benchmarking rate (currently the Central Bank of Kenya Rate). Interest is usually paid either at the end of each interest period or at the term of the loan.
Default Interest on the other hand refers to the increased interest (over and above the price of the loan) that is payable on any outstanding amounts in relation to due repayments.
In case you are curious about loan agreements and getting all the legal bases for your business covered in One Simplified Affordable Actionable Step without the pain of hiring a lawyer for 100 different things you need as a small business in Kenya, please click here to access my timeless BLB Framework.