Whether your business loans money to individuals seeking to start a business or you financed the sale of a previous commercial venture, a loan default could harm your financial bottom line. According to The Balance, a default occurs when a borrower fails to meet the payment terms outlined in a written contract, no matter the nature of the sale.
Including an event of default clause in your contract can prevent misunderstandings and conflicts between yourself and a borrower, as well as protect your best interests while you finalize a sale contract, and it does so in several ways.
An event of a default clause can make the terms of the loan clear, especially in terms of possible consequences. You can make these clear and they may include a variety of penalties, including:
- Legal action
- Seizure of the business
- Permanent seizure of borrower collateral
Making these consequences clear to your borrower may discourage late payments or other actions that result in a default.
Special circumstance clauses
Even if you understand that your borrower intends to pay a loan, sometimes illness, injury or the death of a loved one or business partner can seriously affect his or her ability to pay on time. You can employ the event of default clause to cover these circumstances. For example, you can outline whether the borrower can utilize a period of extension, how long that may last and whether the borrower may use that grace period more than once in a certain length of time, such as once annually.
As a lender or finance, you may want to make your event of default clause as specific as possible. The more details you add the better protected your investment overall.