Drafting a Term Loan Agreement

06/09/2023

27 min

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Drafting a term loan agreement is an essential step for any business or entrepreneur. It is a legally-binding document which outlines the terms and conditions of the loan, such as interest rate, payment schedule, collateral and other important details. The Genie AI team understands just how important it is to have a well-crafted agreement in place - something which helps protect the legal rights and interests of both parties involved.

When drafting a term loan agreement there are several factors to consider. Firstly, it’s vital to specify the amount being borrowed and when payments are due; this gives lenders an indication of creditworthiness and allows them to manage their cash flow more effectively. Structure of repayment should also be taken into account; this could include installments over an extended period or one lump sum paid at maturity. Interest rate should also be specified - although there may be consensus on certain aspects across different countries, this can also vary based upon individual circumstances, so it’s best to discuss with your lender beforehand what would work best for you both.

Aside from cost considerations, it’s also wise to include security or collateral in your agreement - this provides protection for lenders if borrowers default on their payments - as well as provisions regarding governing law and jurisdiction (to ensure enforcement). Dispute resolution clauses should also be included; these help avoid long court cases by settling any disagreements quickly and efficiently between both parties involved.

To conclude: no matter what stage you’re at in your business journey, a term loan agreement is always worth investing time into crafting correctly - not only because it safeguards everyone’s interests but provides clarity on the terms of the loan too! To help you do that without paying legal fees we’ve developed Genie AI – the world’s largest open source legal template library – containing millions of datapoints designed to show market-standard agreements like yours! Our community template library enables anyone to draft & customize high quality documents quickly & easily – why not read on below for our step-by-step guidance & find out how you can access our templates today?

Definitions

Principal: The amount of money borrowed in a loan.
Interest: The amount paid by a borrower to a lender for the use of borrowed money.
Maturity Date: The date on which the loan must be repaid in full.
Collateral: Something of value that is pledged as security for repayment of a loan, to be forfeited in the event of a default.
Default: A failure to make payments or comply with the terms of a loan agreement.
Secured Loan: A loan that requires the borrower to provide some type of collateral, such as real estate or equipment, in exchange for the loan.
Unsecured Loan: A loan that does not require any type of collateral and is based solely on the borrower’s creditworthiness.
Fixed-rate Loan: A loan with a fixed interest rate that does not fluctuate over the term of the loan.
Variable-rate Loan: A loan with an interest rate that can change over the term of the loan.
Credit Line: A type of loan that provides access to a certain amount of money that can be used as needed and repaid over a period of time.
Lien: A legal claim against a property that must be settled before the property can be sold or transferred.
Security Interest: A legal right granted by a borrower to a lender to secure repayment of a loan.

Overview of the key components of a term loan agreement
Understand the key terms associated with a term loan agreement
Become familiar with the different types of agreements
Understand the differences between fixed-rate and variable-rate loans
Negotiating the terms of a loan
Understand the purpose of the loan
Determine the desired loan amount
Negotiate the interest rate and repayment terms
Understanding the types of term loan agreements
Understand the difference between term loans and credit lines
Become familiar with the different loan types and their advantages/disadvantages
Drafting the loan agreement
Prepare a loan agreement document
Identify the parties involved
Incorporate all the terms and conditions of the loan
Establishing the interest rate
Determine the type of interest rate (fixed or variable)
Set the interest rate for the term of the loan
Setting repayment terms
Determine the repayment period
Set the payment frequency
Specify the payment due date
Establishing security and collateral
Determine the type of collateral to be used
Obtain a legal description of the collateral
Set out the terms of the lien or security interest
Finalizing the agreement
Review the agreement to ensure it accurately reflects the terms of the loan
Make any necessary changes to the agreement
Signing and notarizing the agreement
Ensure that all parties sign the agreement
Have the agreement notarized
Understanding the legal implications of a term loan agreement
Understand the legal obligations of both parties
Understand the rights and remedies of both parties
Become familiar with the applicable state and federal laws

Get started

Overview of the key components of a term loan agreement

Understand the purpose of a term loan agreement and the parties involved
Familiarize yourself with the sections that make up a term loan agreement, including the loan details, repayment terms, default provisions, and other important elements
Research the applicable laws and regulations that may affect the terms of the agreement
When you feel comfortable with the key components of a term loan agreement, you can move on to the next step.

Understand the key terms associated with a term loan agreement

Read up on and understand the definitions of common loan terms such as “principal”, “interest”, “repayment schedule”, and “collateral”
Learn about the different loan structures and what each of them entails
Research the various types of interest rate options, such as fixed, adjustable, and convertible
Identify the key documents that will be needed to complete the loan agreement
Understand the implications of the terms in the agreement and the consequences of defaulting
Once you are comfortable with the terminology and understand the potential implications of the agreement, you can proceed to the next step.

Become familiar with the different types of agreements

Learn about the structure of a term loan agreement, such as the borrower and lender, the loan amount, the repayment schedule, and security
Become familiar with the different types of term loan agreements, such as fixed-rate, variable-rate, and adjustable-rate loans
Understand the differences between term loan agreements and other types of loan agreements, such as revolving credit agreements
Research local laws and regulations to determine which type of term loan agreement is best suited for the situation
When you are able to explain the structure and different types of term loan agreements, you can check this step off your list and move on to the next step.

Understand the differences between fixed-rate and variable-rate loans

Learn the basics of fixed-rate and variable-rate loans, including their differences in interest rates and repayment terms
Research the cost of each type of loan and determine which could be more beneficial for your needs
Find out the typical duration of each type of loan and compare the repayment periods
Gauge the flexibility of fixed-rate and variable-rate loans and determine which could be more suitable for your situation
Understand the risks associated with each type of loan to make an informed decision
Once you have researched and familiarized yourself with the differences between fixed-rate and variable-rate loans, you can check this off your list and move on to the next step.

Negotiating the terms of a loan

Analyze the creditworthiness of the borrower and the purpose of the loan
Review the interest rate, repayment terms, and other relevant details
Reach an agreement with the borrower and document it in writing
Have both parties sign the loan agreement
When both parties have signed the loan agreement, you can move on to the next step: understanding the purpose of the loan.

Understand the purpose of the loan

Identify the type of loan being negotiated, such as a term loan, lines of credit, or other types of loans
Consider the purpose of the loan and the needs of both the lender and the borrower
Outline the intended use of the loan proceeds and any restrictions on the use of the funds
Discuss the terms of repayment and other conditions of the loan
Once all of these points have been agreed upon, you can move on to the next step: determining the desired loan amount.

Determine the desired loan amount

Review the borrower’s financials and other relevant documents, such as the proposed business plan
Discuss the loan amount with the borrower to ensure it meets their needs
Calculate the amount of the loan, taking into consideration all potential expenses
Confirm the loan amount with the lender and borrower
Once you have agreed on the loan amount with all parties, you can check this step off your list and move on to negotiating the interest rate and repayment terms.

Negotiate the interest rate and repayment terms

Contact potential lenders to discuss the interest rate and payment terms they are able to offer
Ask for separate quotes from each lender
Compare the quotes and negotiate the best terms possible
Ensure the terms include things like interest rate, repayment period, repayment schedule, late payment fees, and other important details
Once a lender has been chosen and the terms have been agreed to, the lender will draw up the loan agreement and send it to you for review
Once the loan agreement has been reviewed and the terms are acceptable, you can sign the agreement to finalize the deal
You will know this step has been completed when you have signed the loan agreement and are ready to move on to understanding the types of term loan agreements.

Understanding the types of term loan agreements

Understand the differences between a secured loan and an unsecured loan.
Learn about the various types of term loan agreements, including bullet loans, amortized loans, and balloon payments.
Become familiar with the terms used in loan agreements, such as principal, interest, and collateral.
Research applicable laws and regulations that affect the loan agreement.

You know you can move on to the next step when you have a good understanding of the different types of term loan agreements, the terms used in them, and the applicable laws and regulations that affect them.

Understand the difference between term loans and credit lines

Learn the definition of a term loan and a credit line
Understand the differences between the two types of loans
Examine the different repayment terms, interest rates, and fees associated with the two types
Know which type of loan best suits your needs
When you have a strong understanding of the differences between term loans and credit lines, you can move on to the next step.

Become familiar with the different loan types and their advantages/disadvantages

Research and acquaint yourself with the different types of term loans available, such as secured, unsecured, and collateralized loans.
Learn the advantages and disadvantages of each type of term loan.
Consider the purpose of the loan, the intended use of the funds, and the borrower’s financial circumstances when selecting the appropriate loan type.
Review the applicable state and federal laws that are applicable to the loan.
When you feel confident and well-informed about the different types of term loans and their advantages and disadvantages, you can move on to drafting the loan agreement.

Drafting the loan agreement

Research and review the relevant laws and regulations that apply to the loan agreement
Create a draft of the loan agreement and include all necessary information, such as the loan amount, interest rate, repayment terms, and any additional provisions
Have the parties review the agreement to ensure it meets all requirements and any applicable laws
Finalize the loan agreement and have all parties sign the agreement

When you have completed this step, you will have a finalized loan agreement document ready for review.

Prepare a loan agreement document

Gather all of the necessary legal documents and forms needed for the loan agreement
Make sure to include an agreement that outlines the terms of the loan and repayment
Draft the loan agreement, including all of the relevant information such as the amount of the loan, the interest rate, and the payment schedule
Ensure that the loan agreement is written in accordance with local and state laws
Check the document for accuracy
Have all parties involved in the loan agreement sign the document
Make sure to keep a copy of the signed loan agreement for all parties involved

When you can check this off your list and move on to the next step:

Once the loan agreement document has been prepared, checked for accuracy, and all parties involved have signed it, you can move on to the next step which is to identify the parties involved.

Identify the parties involved

Identify the lender and borrower and include their names, addresses, and contact information in the document
Research the legal names for each party to ensure accuracy in the document
Confirm the identity of each party with a valid form of identification
Once the parties have been identified and the legal names have been confirmed, you can move on to the next step of incorporating all the terms and conditions of the loan.

Incorporate all the terms and conditions of the loan

Gather all relevant information, such as the loan amount, repayment terms, and other details specified in the loan agreement
Research applicable laws and regulations to ensure that the loan agreement is in compliance with all applicable laws
Draft a document that outlines the details of the loan agreement, such as the amount of the loan, repayment terms, interest rate, collateral, and any other conditions associated with the loan
Ensure that the language used in the loan agreement is clear and unambiguous
Have the loan agreement reviewed by a lawyer or other qualified professional to ensure that all applicable laws are being followed
Have both parties sign the loan agreement, making it legally binding

Once the loan agreement has been drafted, reviewed, and signed by both parties, it can be considered complete and ready to be enforced.

Establishing the interest rate

Set the interest rate for the loan: Consider the borrower’s creditworthiness and the market rate when setting the interest rate.
Decide on a method to calculate interest: Choose a method to calculate interest (e.g. simple or compound) that is the most advantageous to the lender.
Specify when interest begins accruing: Make sure the loan agreement states when interest begins accruing, whether it is at the time of closing or after.
Incorporate the interest rate into the loan agreement: Include the interest rate in the loan agreement for reference.

Once all of the above steps have been completed, you can move on to the next step of determining the type of interest rate (fixed or variable).

Determine the type of interest rate (fixed or variable)

Review the loan request and the borrower’s financial situation to decide the best type of interest rate for the loan
Evaluate the risks associated with a fixed or variable interest rate
Compare the current rates of the two types of interest rate
Determine which type of rate will be most beneficial in the long run
Once the type of interest rate is chosen, you can move on to the next step of setting the interest rate for the term of the loan

Set the interest rate for the term of the loan

Research current market rates to determine a fair rate of interest for the loan
Consider the borrower’s credit rating, current market conditions, and other factors that could affect the interest rate
Negotiate the interest rate with the borrower
Draft the loan agreement to include the agreed-upon interest rate
Ensure that the interest rate is clearly stated in the loan agreement
When the interest rate is finalized, you can move on to the next step of setting repayment terms.

Setting repayment terms

Agree on a repayment schedule that works for both the borrower and the lender
Determine the frequency of payments (monthly, quarterly, etc.)
Agree on a payment amount
Account for future payments, including the principal and interest due
Set a date for the final repayment
Include a grace period for missed payments

When you have agreed on the repayment schedule and determined the frequency of payments, payment amounts, and final repayment date, you can check this step off your list and move on to the next step.

Determine the repayment period

Review the loan agreement’s purpose and the borrower’s ability to repay the loan within a certain period
Consider the terms of the loan, including the repayment amount, interest rate, and other fees
Discuss the repayment period with the borrower and come to an agreement
Include the repayment period in the loan agreement
Make sure to note any changes to the repayment period in the loan agreement
Once the repayment period has been determined and included in the loan agreement, this step can be checked off the list and the next step can be moved on to.

Set the payment frequency

Decide on the payment frequency for the loan. This could be weekly, bi-weekly, monthly, or quarterly.
Discuss the payment frequency with the borrower and lender and come to an agreement.
Draft the payment frequency in the loan agreement.
Once the payment frequency has been specified in the loan agreement, you can check this step off your list and move on to the next step.

Specify the payment due date

Discuss and agree on a payment due date with the lender
The payment due date should be included in the loan agreement
The payment due date should be a specific date, such as the 15th of the month
Enter the agreed-upon due date in the loan agreement
Check that the due date is accurate and matches the agreed-upon language
When the due date is specified, you can check this off your list and move on to the next step of establishing security and collateral

Establishing security and collateral

Draft a clause specifying the security and collateral to be used in the Term Loan Agreement
Outline the type of collateral that may be provided as security
Make sure to include a clause stating that the collateral will be held as security for the repayment of the loan
When the loan is fully repaid, the collateral must be released to the borrower
Check off this step once the security and collateral clauses have been drafted and finalized.

Determine the type of collateral to be used

Research types of collateral that may be used with a term loan agreement.
Talk to your lender to determine what type of collateral they will accept.
Consider the value of the collateral, as well as the potential risks associated with it.
Draft language in the agreement that outlines the type of collateral to be used, and any associated terms and conditions.

Once the type of collateral to be used has been determined, you can move on to obtaining a legal description of the collateral.

Obtain a legal description of the collateral

Identify the exact property that will be used as collateral for the loan.
Retrieve the legal description of the property, which can be found in the deed or title documents.
Have a real estate attorney review the legal description to make sure it is accurate and up-to-date.
Draft a legal description in the term loan agreement that accurately describes the collateral.
Once the legal description is obtained and reviewed, you can move on to the next step.

Set out the terms of the lien or security interest

Draft the security agreement and lien documents: Ensure they accurately capture the rights and interests of the parties involved, including the lender, borrower, and any third-party guarantors.
Include the legal description of the collateral in the agreement: This should include the type, value, and location of the collateral.
Discuss any other terms for the security interest or lien: These may include the duration of the interest, how the interest can be released, and any other special instructions.
When complete, the lien or security interest agreement should be signed by all parties involved.
Once all parties have signed the agreement, it should be filed with the relevant government agency to be officially recorded.
Once the agreement is filed, the lender and borrower can move forward with the loan.

Finalizing the agreement

Review the agreement in its entirety to ensure it accurately reflects the terms of the loan as agreed by both parties
Ask the other party to sign the agreement, and provide a copy to the other party
Ensure all necessary signatures have been included
Notarize the agreement if necessary
Have each party date the agreement
Once all these steps have been completed, the agreement is finalized and ready to be used.

Review the agreement to ensure it accurately reflects the terms of the loan

Carefully review the terms and conditions of the agreement.
Check that the loan amount, interest rate, repayment schedule, and other important details are accurately reflected.
Confirm that the agreement meets the requirements of the lender and borrower.
Verify that the agreement complies with the relevant laws and regulations.
When you are satisfied that the agreement accurately reflects the terms of the loan, you can move on to the next step.

Make any necessary changes to the agreement

Read through the agreement to make sure all of the terms, conditions, and definitions reflect the loan agreement you discussed with the lender
Check to make sure the loan amount, interest rate, repayment period, and any other fees or charges are all accurately indicated in the agreement
Make any changes that need to be made to the agreement to ensure it accurately reflects the loan agreement
Once all changes have been made, have both parties review and sign the agreement
You know you can check this step off your list when all changes are made and the agreement is signed by both parties.

Signing and notarizing the agreement

Obtain all of the required signatures from all of the parties involved in the term loan agreement
Have all of the signatures notarized
Make sure to keep a copy of the agreement with all of the original signatures
Once all of the signatures are obtained and notarized, the agreement is considered legally binding and can be enforced in a court of law
You can check this step off your list when all of the parties involved have signed and notarized the agreement.

Ensure that all parties sign the agreement

Obtain signatures from all parties involved in the loan agreement.
Ensure signatures are included in the required places on the agreement.
Once all parties have signed the agreement, you have completed this step and can move on to the next step.

Have the agreement notarized

Find a professional notary who can witness the signing of the term loan agreement
Have all parties sign the agreement in the presence of the notary
The notary will then check the identities of all parties and confirm that they have willingly signed the agreement
The notary will stamp and sign the agreement to verify that it was notarized correctly
After the agreement has been notarized, you will know that it is legally binding
You can then check this off your list and proceed to the next step of understanding the legal implications of a term loan agreement.

Understanding the legal implications of a term loan agreement

Research and understand all the applicable laws and regulations in your jurisdiction that apply to the loan agreement
Consult with an attorney to discuss the legal implications of the loan agreement and the obligations of both parties
Ensure the loan agreement contains all the necessary clauses and provisions to protect both parties
Once you have a comprehensive understanding of the legal implications of the loan agreement and all relevant laws and regulations, you can move on to the next step.

Understand the legal obligations of both parties

Research relevant laws and regulations that apply to the loan agreement
Identify the duties and obligations of each party
Ensure that all relevant laws and regulations are accurately incorporated into the loan agreement
Confirm that all parties involved understand and agree to the obligations as outlined in the loan agreement
Check that all parties are in compliance with applicable laws and regulations

When you have identified the duties and obligations of each party, incorporated applicable laws and regulations into the loan agreement, and confirmed that all parties understand and agree to the obligations outlined in the loan agreement, you can move on to the next step.

Understand the rights and remedies of both parties

Review the applicable state and federal laws to ascertain the rights and remedies of the parties
Determine the rights of the lender and borrower in the event of a breach of the agreement
Understand the remedies available to both parties in the event of a breach
Note any provisions related to litigation, arbitration, or other dispute resolution mechanisms
Note any provisions related to indemnification
Document the rights and remedies of both parties in the loan agreement

You will know when you can check this off your list and move on to the next step when the ri