How to read a business loan contract

Business loan contracts are long, dense and written by lenders’ lawyers. Many owners sign them after reading the first page. Yet the clauses on page nine are often the ones that matter most when something goes wrong. You do not need to be a lawyer to read a contract usefully; you need to know where to look and what questions to ask.

Start with the schedule

Most contracts have a schedule, key details page or offer letter that summarises the deal: borrower, guarantors, amount, term, repayments, fees, security and special conditions. Check every line against what you were offered. Is the borrower the right entity, such as your company rather than you personally? Are the guarantors the people you expected? Does the repayment match the quote? Errors here are easier to fix before signing than after.

The money clauses

Look for:

• Advance and drawdown: how and when funds are released, and any conditions.
• Fees: establishment, documentation, monthly, line, dishonour, variation, discharge and early repayment fees.
• Interest or cost: how it is calculated, when it is charged and whether it can change.
• Repayments: amount, frequency, start date and any balloon.

Add every repayment and fee together and compare the total with the amount you receive. Our true cost calculator does this quickly.

Security and guarantees

These clauses describe what the lender can claim if things go wrong. Check exactly which assets are covered, whether a general security agreement extends to future assets, whether a mortgage or caveat will be registered, and which guarantees are required. Read our guides to security and GSAs and personal guarantees for detail. Searches and registrations for personal property appear on the PPSR.

Covenants and undertakings

Covenants are promises you make for the life of the loan. Common ones include providing financial statements each year, keeping assets insured, maintaining minimum financial ratios, notifying the lender of changes in directors or ownership, and not granting security to anyone else without consent. Make a list of every ongoing obligation and diarise the reporting dates. Breaching a covenant can be a default even if every repayment is made.

Default: the most important clause

The default clause lists events that let the lender take action. Missed repayments are the obvious one. Others can include:

Event	Why it matters
Breach of any covenant	A reporting slip can technically be a default
Cross-default	A default on another loan triggers this one
Insolvency events	Including appointing an administrator
Change of control	Selling shares or changing directors without consent
Material adverse change	Broadly defined, can give the lender discretion
Misleading information	Errors in the application

Then read what happens on default: default interest, enforcement costs, the lender’s right to demand full repayment and enforce security, and any notice periods or chances to remedy.

Early repayment and payout

Find the clause that explains whether you can repay early, how much notice you must give, how the payout figure is calculated and what fees apply. Ask for a worked example at a point halfway through the term. Our guide to early repayment and payout figures explains common methods.

Variations and reviews

Some contracts let the lender change fees, charges or terms with notice, or review facilities periodically and alter limits. Check what can change, how much notice you will receive and whether you can exit without penalty if you do not agree.

Boilerplate that still matters

Clauses on notices, set-off, assignment, governing law and dispute resolution are easy to skip. Two are worth a look: set-off, which may let the lender take money from other accounts you hold with it, and assignment, which lets the lender transfer the loan to someone else. If a dispute arises, small businesses can seek information and help from the Australian Small Business and Family Enterprise Ombudsman.

Questions to ask before signing

1. Can you show me every fee and the total of all repayments?
2. What exactly will be registered against my assets or property?
3. Which events, apart from missed repayments, count as default?
4. How would a payout halfway through be calculated?
5. Which terms can you change after I sign, and how?

Our list of questions to ask a lender has more.

An illustrative example

A made-up IT services company is about to sign a facility when the director notices a covenant requiring audited accounts each year. The business has never had an audit. She raises it, and the lender agrees to replace the requirement with accountant-prepared financial statements. A single question avoided a technical default in the first year.

Conditions precedent

Many contracts list conditions precedent: things that must happen before the lender releases funds. Typical examples are signed guarantees, a satisfactory valuation, evidence of insurance, payout of another debt, a solicitor’s certificate for guarantors or a board resolution for companies. Make a checklist from this section the day you receive the contract and assign each item to someone. Most settlement delays trace back to a condition nobody noticed until the last minute.

Want help understanding an offer?

If you have an offer and want to understand whether it suits your business, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than many. Mention the clauses that concern you in your enquiry, and for legal interpretation always speak with your own solicitor.