When signing a business loan agreement, it’s important to focus on the loan amount, interest rates and payback schedule. But don’t let these important details distract you from fully understanding the other terms of the agreement.
For example, a clause or legal device known as a Confession of Judgment is something that entrepreneurs who are launching a startup should avoid when arranging for small business financing. Keep reading to understand what a Confession of Judgement is and how signing one can impact your business if you default on the loan.
Confession of Judgment 101
A Confession of Judgment is a clause within a contract in which the debtor agrees to let the creditor obtain a judgment against him or her — without any advanced notice or a hearing — if the debtor does not pay back the money according to the terms of the loan. The Confession of Judgment can also require startup owners who applied for business loans to waive their right to defend against the entry of the judgment and/or to be represented by an attorney that the creditor selects.
The Inherent Risks of a Confession of Judgment
Here’s the good news: if a small business owner signs a Confession of Judgment while arranging for a business loan, it will not go into effect as long as the borrower is meeting the terms of the loan. But once a payment is missed or any other terms are not met, the lender can head to the court to enforce the Confession of Judgment and start collecting money.
In other words, signing a Confession of Judgment essentially means that the borrower is pleading guilty to any breach in the contract terms. In addition, debtors will waive their right to try to get a legal defense ready and they will also not be able to work out a new deal or plan with the lender. While it is technically possible that some lenders will be more forgiving and understanding if a payment is missed, small business owners who have taken out a loan should never assume this will be the case. Even if a payment was missed because of a bank error, a computer glitch or other issue that may be outside of the borrower’s control, legally the creditor can start filing the Confession of Judgment against him or her right away.
Confessions of Judgment are Not Inevitable
Fortunately, small business owners who need a cash advance to start their company do not need to sign a Confession of Judgment. In fact, they are only permitted in a small number of states including Maryland, New Jersey, Ohio, Pennsylvania, Texas and Virginia, as well as a few others. In addition, not every lender will use a predatory practice like a Confession of Judgment; for instance, the lenders at Zinch will work with applicants, even those who are seeking loans for businesses with no credit, to find flexible and reasonable financing options that will not include this exploitative practice.
Focus on the Business, not the Confession of Judgment
Opening a new business can be both thrilling and stressful. It would be truly tragic for budding entrepreneurs to have their finances seized by a lender because of one missed payment or even a simple computer error. It is reassuring to realize that the Confession of Judgment is not something that must be signed. Even entrepreneurs who live in states where they are used can still shop around for lenders that use other methods to secure loans and help them reach their goals of owning their own company.
