What to check in a business loan before you sign
A checklist for reading a business loan offer: the full cost, the Key Facts Statement, collateral and guarantees, prepayment, repayment fit and what to do if something goes wrong.
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Most loan problems begin with something that was in the paperwork. The interest rate is the line everyone reads. The fees, the charge for repaying early, the guarantee, the insurance added to the loan and the clause on what happens if you are late are usually where the surprises are.
This checklist is general awareness for owners who are considering a loan. It does not tell you whether to borrow, it does not recommend any lender or scheme, and rules change, so confirm the current position with the lender and take your CA's advice before you sign.
What you should come away with
- Ask for the Key Facts Statement and read the annual percentage rate, not only the interest rate
- List every fee and charge, including late-payment and prepayment terms, in writing
- Know exactly what security and personal guarantees you are giving
- A credit guarantee scheme protects the lender, not you
- Test the repayment against a slow month, not an average one
- Check that the lender is regulated, and know where to complain
One: ask for the Key Facts Statement. RBI requires lenders to give borrowers of retail and MSME loans a Key Facts Statement, a short document in a standard format, before the loan is taken. It sets out the amount, the interest rate and whether it is fixed or floating, the fees, and an annual percentage rate that shows the all-in yearly cost of the loan. Read this before the long agreement. If you have not been given one, ask for it. Compare it with the sanction letter and the agreement, and ask about any difference.
Two: add up the cost. A rate quoted on its own does not tell you what you will pay. Find the processing fee and any documentation or inspection charges, taxes charged on those fees, any insurance or other product added to the loan, charges for late payment or a bounced instalment, and charges for part-payment or closing the loan early. Ask for each in writing.
Three: understand the rate. Is it fixed, or floating? If floating, what is it linked to, and how often can it change? What happens to your instalment if it rises: does the instalment go up, or does the loan run longer? Ask the lender to show you the instalment if the rate rises.
Four: find out about early repayment. RBI has issued directions on prepayment charges that apply to loans sanctioned or renewed from 1 January 2026. They restrict such charges on many loans to individuals and to micro and small enterprises, but the details depend on the type of lender, the size of the loan and the kind of facility, and any charge has to be disclosed in the sanction letter, the agreement and the Key Facts Statement. Ask the lender, in writing, whether any charge applies if you repay early.
Five: see what you are putting at stake. Security means what the lender can take if the loan is not repaid. For loans to micro and small enterprises, RBI's MSME lending directions say banks should not insist on collateral up to a limit, which RBI raised from ₹10 lakh to ₹20 lakh for loans sanctioned or renewed from 1 April 2026. How that applies to your loan depends on the lender, so ask. Also ask about personal guarantees, whether family members must sign as guarantors, and how security is released when the loan is repaid.
A note on credit guarantee schemes. Under the Credit Guarantee Scheme for micro and small enterprises, a government-backed trust guarantees part of the loan to the lender so that the lender can lend without collateral. The guarantee protects the lender. You are still liable to repay.
Six: check your credit record before you apply. Under RBI's rules, each credit information company must give you one free full credit report a year. Get it, read it, and ask for corrections to anything wrong. Lenders read this report before they speak to you, and for a small business the owner's personal record often counts. Many applications in a short time can lower a score.
Seven: test the repayment. A lender approving a loan only means the lender is willing to lend. It does not mean the business can carry it. A made-up example: if the business has ₹80,000 a month left after its costs and the instalment is ₹60,000, one weak month will break the plan. Run the sum for your slowest month, and ask what happens if sales fall by a fifth. Make sure some cash remains after the instalment.
Eight: match the loan to the need. A short loan for a long-lasting asset puts pressure on cash. A long loan taken for a short gap can leave you paying for months after the need has gone.
Nine: check who is lending. Banks, small finance banks and NBFCs registered with RBI are regulated, and RBI publishes lists of regulated entities on its website. Be careful with anyone who asks for a fee before the loan is released, promises approval without looking at your records, will not give terms in writing, or presses you to sign today. If you are unsure, ask your bank or your CA before you share documents or pay anything.
Ten: read what happens when things go wrong. Find the clause on default and ask how many missed instalments count, what notice is given, and what recovery steps are allowed. Ask for any verbal promise to be put in writing.
If a problem arises, complain first to the lender in writing and keep a copy. If you do not get a satisfactory answer in the time the lender allows, RBI has complaint channels for customers of regulated entities, which you can find on its website.
Finally, do not sign on the day you first see the paperwork. Take it home, mark every line you do not understand, and show it to your CA. This is general awareness and not individual advice, and it does not tell you whether you should borrow.