When you start a business, you generally have two ways to raise capital: loans and equity contributions. There are some obvious disadvantages to loans. They require you, for example, to pay back the lender whether or not the business is successful, which is not the case with equity contributions. But the advantage of a typical loan is that if your business prospers, the lender is only entitled to an interest return on its loan -- not a percentage of the profits or a share in the company that an investor would expect.

Whether you obtain loans from a bank, individuals or other lenders, a number of variables can affect how good or how bad they are for your business. Virtually all of these variables are negotiable: There is no such thing as a "standard loan. Be sure to negotiate these key issues if you plan to get a loan for your business:

Due Date.
You need to set a date when the loan is to be repaid. This can be formulated as a lump-sum payment at the end of the term of the loan or as a periodic payment of principal with a final payment. Make sure that the payment schedule is reasonable given your anticipated cash flow. Realize that interest will be charged to you either way.

Interest Payments.
When a lender establishes an interest rate, it must comply with any applicable state usury laws. (These laws govern how much interest can be charged on a loan.) Often, however, usury laws will not apply to banks. The law may also allow a lender to charge a higher interest rate for business loans than for personal loans (such as consumer credit). The interest payment dates should be clearly defined -- the most common method requires monthly interest payments due the first day of each month. You might also try to adjust the timing of your interest payments to match the cash flow patterns of your business.

Loan fees. The lender may charge up-front loan or processing fees. Check these fees carefully, and try to get an estimate as soon as possible to help you evaluate the loan package.

Prepayment.
Ideally, you want to be free to pay off the loan at any time before its due date. Make sure that your loan agreement or promissory note gives you this flexibility and try to avoid a prepayment penalty for paying off the loan early.

Defaults.
The lender may define a variety of events that will constitute a default on the loan, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the loan documents. Try to negotiate advance written notice of any alleged default, with a reasonable amount of time to cure the default.

Checklist of Issues in Negotiating a Loan

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