Quick answer
A loan agreement is the legally binding contract between a borrower and a lender. It sets out the amount lent, the loan term, repayments, fees, any security and guarantees, the borrower's ongoing promises and what counts as a default. For Australian business loans it is usually signed after accepting a letter of offer, and it is the document that governs the loan if anything goes wrong.
Key points
- The loan agreement, not the sales pitch or the offer letter, is what binds both sides
- Business-purpose loans generally fall outside the consumer National Credit Code
- Since 9 November 2023 unfair terms in many small business contracts are illegal and can attract penalties
- Events of default, cross-default, guarantees and early payout costs deserve the closest reading
Every business loan rests on a contract. The broker’s summary, the lender’s website and the letter of offer all describe the deal. But when there’s a disagreement, a missed payment or an early payout, the signed loan agreement decides who is owed what.
What’s inside a business loan agreement?
Agreements vary in length, from a few pages for a short unsecured loan to a thick bundle for a property-secured facility. Most contain the same building blocks:
| Section | What it covers | What to check |
|---|---|---|
| Parties | Borrower, lender, any guarantors | The right entity is borrowing: company, trust or you personally |
| Amount and drawdown | How much, and when it’s paid out | Deductions taken from the advance, such as fees or prepaid interest |
| Term and repayments | Length, frequency and amount | Whether repayments are daily, weekly or monthly, and any balloon at the end |
| Fees and charges | Establishment, ongoing, late and payout fees | What you’ll pay overall in dollars |
| Security | Mortgages, caveats, a general security agreement | Exactly which assets are bound |
| Undertakings | Your ongoing promises, called covenants | Reporting dates and things you can’t do without consent |
| Events of default | Triggers for enforcement | Triggers beyond a missed payment |
| Early repayment | Your right to pay out early | Break costs or minimum interest periods |
Which protections apply to business borrowers?
Loans taken predominantly for business purposes usually sit outside the National Credit Code, which protects consumer borrowers. That’s why lenders ask you to sign a business-purpose declaration. Make sure it’s accurate. Signing one for what is really a personal loan creates problems for both sides.
Business borrowers still have protections, though. Since 9 November 2023, unfair terms in standard-form small business contracts aren’t just void but illegal, and lenders can face penalties for using them. Under the ASIC Act, a business counts as small if it employs fewer than 100 people or turned over less than $10m in the previous income year, provided the upfront price of the contract, excluding interest, is $5m or less. Banks signed up to the Banking Code of Practice accept extra obligations for small business customers too, including notice periods before acting on most defaults.
If any part of the paperwork confuses you, ask us to talk you through your options before you commit.
Which clauses deserve a second read?
- Events of default. Look past missed payments. Insolvency events, a false statement in the application, a change in ownership or a default on another loan can all count.
- Cross-default. A default on your equipment finance could also put this loan in default.
- Guarantees. A director or personal guarantee may cover all money owed to that lender, not just this loan.
- Default interest and enforcement costs. These are what you’d pay if things go wrong.
Example: two loans, one clause
An illustrative Ballarat joinery company signs a $250k property-secured loan to buy a CNC machine, and already has a $60k truck lease with the same lender. The agreement includes a cross-default clause and an all-moneys guarantee from the director. Months later, a slow-paying builder causes two missed lease payments. Under the clause, the lender is entitled to treat the $250k loan as in default too, even though every repayment on it was made on time. Spotting that link before signing gives the owner a chance to negotiate it out or keep the two facilities with different lenders.
Our guide to reading the fine print on a business loan goes further, while our list of questions for a lender before signing works well as a checklist.
Related terms
- Letter of offer: the summary issued ahead of the full contract
- Term sheet: an early, usually non-binding outline of the deal
- Conditional approval: the stage when conditions must be met before documents are issued
- Loan term: the length of the agreement
Want a loan agreement you’re comfortable signing?
The best way to avoid nasty clauses is to start with a lender whose terms fit your business. Tell us what you need in an enquiry that takes about sixty seconds. Asking costs nothing on your credit report, and we don’t scatter your file across dozens of funders. A member of our team works through your details and calls you directly. Give us accurate numbers and it’s far more likely the first agreement you see is one worth signing.
Frequently asked questions
Is a letter of offer the same as a loan agreement?
Not usually. A letter of offer summarises the proposed deal and its conditions. Once you accept it and meet the conditions, the lender issues the full loan agreement and security documents for signing. Some short-term lenders combine the two.
Can I sign a business loan agreement electronically?
Many lenders now use electronic signing for loan agreements. Some security documents, such as mortgages over land, may still need specific execution or verification steps depending on the state and the lender.
Does the National Credit Code protect business borrowers?
Generally not. The Credit Code covers credit used predominantly for personal, household or domestic purposes, and residential investment property. Lenders usually ask you to sign a business-purpose declaration confirming the loan is for business use.
Can I change a loan agreement after signing?
Only by agreement with the lender, usually through a written variation. Common variations include changing the repayment date, extending the term or releasing a security, and lenders may charge a fee.
What happens if a term in my loan agreement is unfair?
If your business and the contract qualify as small business under the unfair contract terms rules, a court can declare an unfair term void, and the lender may face penalties. The rest of the contract usually continues.