Loan Agreement in Colorado: Important Provisions to Consider When Negotiating Your Loan Agreement
A business loan isn’t always the first line of defense when it comes to creating a financial buffer for your business, but when you are dealing with an emergency or when things are not going as they should, a loan often comes in handy, and it saves the day. But before you settle on the terms proposed by the lender, ask yourself whether you’d qualify for better terms. At the end of the day, finding the best terms for your business (or even personal) loan is all about negotiation. While the bank always looks after itself, meaning that the terms of any agreement drawn up will always be set in a way that the bank has the highest chance of getting its money back. With this in mind, and as the bank’s standard operating procedure, lenders always insist on coming up with a draft of the loan contract – with boilerplate language that’s extremely favorable to them, have you look at it, then you can pick up from there. With this in mind, you need to make sure that the loan agreement you are signing has terms that are favorable to you, too (as the lender).
To learn more about the draft loan agreement and what you could expect from the lender, you might want to download a free Colorado loan agreement form. Much like the lender’s, this agreement specifies the sections/ clauses that must be on the agreement, and it also guides you in matters like the statutory provisions for the interest rates. A loan agreement in Colorado is only enforceable, and the terms in it will only hold in court (in the event of a dispute) if the document adheres to the state laws. To help you get started on the right foot, these are the important provisions/ clauses that you must consider while negotiating the terms laid out in the loan contract.
It’s also worth noting that the loan contract is a lot like the promissory notes (the names are used interchangeably) with the main differences between the two being the complexity and the comprehensiveness of the loan contract, unlike the promissory note which has fewer details and it’s also enforceable with the signature of the borrower alone.
Essential Provisions of the Loan Agreement
This is the introductory section of the loan agreement, and it specifies and defines the meanings of all the terms and parties, while also introducing/ naming the parties to the agreement.
Interest rates and the repayment terms
Besides the loan amount, you need to be careful about the interest rate charged, as well as the terms of repayment. Whether you are using a loan agreement or a promissory note, the loan’s interest rates should be in line with the requirements outlined in the statutes. The state of Colorado limits the interest rates for consumer loans to 12%, but this interest isn’t applicable to agricultural loans, business loans, mortgages, savings, and loans. But even with these limits on the loans, we all know that some lenders charge higher rates of interest. To avoid paying higher than necessary interest rates, you need to go through the fine print before you click on the I Agree button, especially when making your loan application online.
Note, however, that where there is no agreement created by the parties, the loan’s interest rate is capped at 8%. The interest rate for non-consumer loans is the highest in Colorado at 45% - this is the highest rate recorded in the country.
Charging interest rates exceeding 45% is considered a Class 6 Felony, and it is punishable by imprisonment of between 12 and 18 months, along with a fine of between $1,000 - $100,000.
The state charges an interest of 85 on legal judgments where the rates haven’t been specified in the contract, in the absence of a contract, or in case of a variable interest contract.
Armed with this information, you should be able to negotiate for favorable terms on loan, and you also need to negotiate the repayment schedule. For the best terms, take into account your relative bargaining power, your financial capability, as well as your revenue projections. And when negotiating the payment schedule (how much you will be repaying and how often), you need to take into consideration the feasibility of the schedule – you need to choose a schedule that gives you a bit of a wiggle room, while also making sure that the schedule allows you to pay down this debt in a systematic manner. By negotiating the best terms, you lower the risk of defaulting the loan and getting yourself into financial trouble.
Lenders use collateral to protect themselves, and depending on their analysis of your repayment capability, you will have to provide collateral/ security for the loan. Collateral is often in the form of cash or assets – basically anything that the lender will liquidate or use to get their money back easily. Be careful about the collateral you choose.
The lender offers default terms, which, if you aren’t careful, will cost you. You need to make sure that the default terms will not affect how your business runs. You should be able to fulfill all the covenants outlined, even when push comes to shove. Look out for generous breach terms during the cure periods and ensure that the maximum and the minimum limits are reasonable. You also need to make sure that you understand the consequences of defaulting.
You also need to look over the details of the cosigners and guarantors/ personal guarantees. And don’t forget to review the terms of the document once again before you sign.
To create a loan agreement in Aurora, Boulder, Denver, Colorado Springs, Fort Collins, Pueblo, Aspen, or any other city in Colorado, download the form here.