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Points to Know About MSME Loan Agreement


Loan agreements are often long and look very tedious to read but they are of huge importance. An MSME loan agreement shouldn’t be taken lightly and should be given the attention it deserves. The loan agreement could be easily 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 clauses attached to a certain loan and the details of them are present in the loan agreements. There are many reasons why people should take loan agreements extremely seriously. In this article, we will have a brief look at MSME loan agreements.

Points to Know About MSME Loan Agreement:

·   Annual percentage rate:

The annual percentage rate or the APR is mentioned in the loan agreement. It is one of the most important things which can be found while looking at the loan agreement. The annual percentage rate decides how much interest your bank or NBFC is going to charge each year.

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

·   Security cover:

The borrower is asked to provide a security cover for their loan to the lender which in this case is the bank or NBFC. When applying for an MSME loan you would be asked to sign security against the loan. This security could be in the form of assets or even a personal guarantee. Financial institutions can ask for additional security at times if the ones that you have offered are not equal to the amount of the loan in sheer market value.

Providing security is a big challenge when opting for taking up an MSME loan. Moreover, if individuals opt for an unsecured loan the rate of interest becomes extremely high, in such loans you don’t have to provide a security but instead pay a much higher interest rate to the bank or NBFC.

·   Prepayment clause:

Your loan agreement is home to a variety of clauses and while going through it you can read about each of them. A prepayment clause is a condition where you repay the full amount of the loan before the due date. In such cases, the borrower can often be charged a penalty.

It's important to go through your loan agreement and change the prepayment clause if needed, especially if you're planning to repay the loan before the fixed date.

·   Penalty charges:

Penalty charges would exist in your loan agreement and would come into action if you are missing out on the payments to the bank. The bank decides a certain amount that would be charged as a penalty if the borrower is unable to pay the fixed amount to the bank in a timely manner.

This fixed amount is decided and mentioned in the loan agreement. Ensuring that you are aware of the penalty charges in the loan agreement will allow you to be stricter with your payment schedule and never miss out on one as you would be subjected to a penalty.

·   MSME loan interest rates:

The most primary factor to look at is the interest rates that are going to be charged by the bank. Every loan has a different interest rate and hence being aware of your MSME loan interest rates is extremely important.

The interest rate shouldn’t be too much and should be manageable for the borrower, the interest rate of your loan and all the details concerning it would be found in your loan agreement document. What's important to remember is to not get confused when people show you the interest rates on a monthly basis, in this situation, it's advisable to go to the bank and ask for the yearly rates.

·   Pre and part payment:

The policies concerning both pre and part payment could be different in each bank and hence it important to be aware of them. The details of both can be usually found in your loan agreement document. At times a certain bank could be only offering a certain facility while some of them could be offering both. Being clear about the bank’s policies would allow you to feel more comfortable.

Final Overview

Loan agreements are the most important documents when it comes to loans. These documents contain all the details of the business agreement. When the borrower is up to date with the clauses in the loan agreement the chances of the loan process finishing smoothly are much higher.

There are many clauses in loan agreements that can often take you by surprise and would result in you paying a penalty to the bank. It's advisable to carefully go over the loan agreement document before signing it.

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