What are the common clauses in commercial loan agreements?
Commercial loan agreements bundle legal and financial terms that govern how a lender and a business interact for the life of the loan. Below are the clauses you will see most often, why they matter, and practical steps borrowers can take.
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Interest rate and pricing — Specifies whether the rate is fixed or variable (often tied to a benchmark such as SOFR), any margin, and how interest is calculated. Ask for clear language about rate resets and look for floors/caps on variable rates.
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Repayment terms and amortization — Defines payment frequency, principal amortization schedule, and final maturity. Understand whether the loan is fully amortizing, interest-only for a period, or contains a balloon payment at maturity.
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Covenants (positive/affirmative, negative, and financial) — Require or prohibit actions (e.g., maintain a minimum debt service coverage ratio, limit additional debt, deliver financial statements). Covenants are common triggers for lender reviews; see our guides on Key Loan Covenants Explained for Small Business Borrowers and Negotiating Loan Covenants: What Small Businesses Can Ask For.
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Events of default and acceleration — Lists breaches (missed payments, bankruptcy, covenant violations) that let the lender accelerate the debt or pursue remedies. Understand cure periods and whether acceleration is automatic or discretionary. For more on triggers and responses, see Acceleration, Covenant, and Event-of-Default: Key Loan Contract Triggers.
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Security and collateral — Describes assets pledged (real estate, receivables, inventory, equipment) and the lender’s priority. Pay attention to perfection requirements (e.g., UCC filings) and carve-outs for operating needs.
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Representations and warranties — Borrower statements about authority, financial statements, liens, and compliance. Inaccurate reps may lead to default even if payments are current.
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Conditions precedent — Requirements to be satisfied before funding (insurance, title reports, corporate approvals). Confirm timing and documentation to avoid funding delays.
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Prepayment, penalties, and fees — Terms for paying the loan early (make-whole, breakage fees), origination fees, ongoing commitment fees, and default interest rates.
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Guaranties and cross-defaults — Personal or corporate guaranties expand lender remedies; cross-default clauses tie multiple loans together—breach one can put all loans at risk.
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Reporting, audit, and covenant monitoring — Frequency and format for financial reports and the lender’s audit rights. Build internal processes to meet reporting obligations.
Practical borrower checklist
- Read definitions carefully—many disputes arise from broad or vague definitions (e.g., “proceeds,” “affiliate”).
- Prioritize covenant flexibility—seek higher ratios, longer test periods, or springing incurrence covenants where possible.
- Negotiate cure periods and de-escalation mechanics before signing.
- Limit cross-default and reduce guaranty exposure (cap amounts or trigger thresholds).
- Confirm what counts as a permitted lien and carve out normal business leases and trade payables.
Professional perspective
In my practice advising small and mid-sized businesses, borrowers who map contract clauses to cash-flow forecasts and stress-test covenant ratios before closing avoid most surprises. Lenders expect negotiation on non-market or unduly broad covenants; asking for specificity and examples often yields concessions.
Authoritative resources
- U.S. Small Business Administration, Loans and Grants: https://www.sba.gov/funding-programs/loans
- Consumer Financial Protection Bureau, Loans overview: https://www.consumerfinance.gov/consumer-tools/loans/
- Federal Deposit Insurance Corporation, Consumer Loans information: https://www.fdic.gov/consumers/loans/
Common pitfalls to avoid
- Assuming terms are non-negotiable—many fees and covenant levels are negotiable, especially with multiple lender quotes.
- Signing without confirming perfection steps for collateral—an unperfected security interest can be worthless in bankruptcy.
- Overlooking administrative covenants such as insurance and tax compliance.
Quick negotiation tactics
- Provide clean, organized financials and a covenant model showing how proposed tests perform over 12–24 months.
- Trade concessions (e.g., slightly higher rate) for covenant looseners or longer cure periods.
- Use senior counsel for complex security packages and intercreditor arrangements.
Disclaimer
This article is educational and does not constitute legal or financial advice. For transaction-specific guidance, consult a qualified attorney and your financial advisor.
