When launching or growing your small business, you’ll likely need to sign several business contracts. At the very least, you may need to sign a lease for your business’s location, as well as contracts for vendors, non-disclosure agreements (NDAs), employment, and others. This can be intimidating for many small business owners.
While this guide is not intended as legal advice, this overview will help you become more aware of the ins and outs of business contracts so you can move forward with confidence as you meet with potential landlords, vendors, and others.
Use this guide to learn why it may be necessary to sign contracts for your business and steps you can take to protect yourself from legal and financial challenges as you move forward.
Why are business contracts needed?
Contracts exist to help protect parties related to a transaction. Let’s use a commercial lease for your business as an example:
- The lease is a contract that lays out the terms of your use of a space including your monthly payment and due date, what you can or cannot do in a space, how long the term of the lease will last, and how much notice you must give a landlord if you decide to end the lease (and vice versa).
- A landlord will typically present you with a lease, and by signing it, you’re agreeing to the terms the landlord offers.
And that’s the case with any type of contract: It lays out the terms of an agreement, potential financial and legal steps that a party can take if the contract terms aren’t met, and other specifics.
But what about protecting yourself and your business?
Why it’s important to review and negotiate business contracts before signing
To secure the things you need to launch or expand your business – from funding to a new location, purchasing equipment, inventory, and more – you may feel pressured to sign contracts before you’ve had a chance to review them fully.
That’s an issue that can lead to potential legal and financial challenges.
It’s essential to review every contract yourself, as well as have an attorney review your contracts. They have experience and can spot issues within the contract, things that are missing that you’ll want to add, or items to be negotiated.
Keep in mind that while contracts are intended to protect different parties in a transaction, they’re usually developed by one side and offer the most protection to that party. Your goal is to ensure that you and your business are also protected.
How contracts can impact small business loans
If you’re applying for a small business loan, it’s important to know that lenders will likely want you to have specific contracts before they can approve your funding. For example, many loans require that a business has a commercial space to operate from, meaning you’ll need to have a lease in place or an identified space with a pending lease agreement.
Other contracts that can arise during the funding process include franchise agreements, purchase contracts, employment agreements, and more.
What about deposits and other financial obligations for contracts?
Along with the signed contract, you may be required to put down a deposit – this is almost always the case for a commercial lease. Other financial obligations include appraisals and valuations, equipment down-payments, etc. This can be a challenge for small business owners who aren’t yet approved for financing.
Sometimes, a lender may approve a loan using a pending lease agreement or letter of intent (LOI) with the stipulation that, at the loan’s closing, the deposit will be paid out of the loan funds. This can help you secure a space and financing without paying deposit funds out of your savings. The same may be true for equipment or inventory that you have to pre-order so that you can move forward quickly to open your business once your loan is approved.
Oftentimes, a landlord or a supplier won’t move forward without a signed contract and any required security deposits or down payments in hand. In these cases, you can try to sign without a deposit and add a required date to get a commitment letter for financing before placing a deposit. If so, talk with your lender about an appropriate timeline and see if this can be negotiated. If that doesn’t work with your landlord, vendor, or selling party (if you’re buying a property for your business), you can try to negotiate a refundable deposit that can be returned to you if you don’t secure financing.
You can also try securing an attorney review contingency. This will give your attorney time to review the signed agreement, explain the terms to you, and negotiate any changes needed.
And, as a last resort, you can sign a contract or lease and make a deposit. Before you do this, though, run this by your attorney and your lender to see if there are any potential losses or legal obligations that you could face.
To minimize your risk, talk to your lender before signing business contracts and making downpayments to ensure that you only do those things that are essential for loan approval.
Pursuit can provide insight and help
As an experienced small business lender, Pursuit can guide you on the contracts you may need as you apply for small business loans.
And when you’re ready to apply, take a look at our financing options – they’re all tailored to meet the needs of small businesses. We offer more than 15 loans and a line of credit for small businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. In addition, Pursuit’s Business Advisory Services offer expert consulting services in financial management, human resources, marketing, and more at no cost to Pursuit borrowers.
Apply today to learn more.
