Credit Agreement Template

In plain language: Defines the type of facility (term loan or revolving credit), the maximum committed amount, and the availability period during which the borrower may draw funds.

Common mistake: Describing the facility type ambiguously — failing to specify whether it is a term loan or revolving line causes disputes about whether repaid amounts can be re-borrowed.

In plain language: Specifies the interest rate — fixed or floating — how it is calculated, the day-count convention, and when interest is due.

Common mistake: Failing to specify the day-count convention and benchmark fallback. When SOFR or another benchmark is unavailable, no fallback means the rate — and every downstream calculation — becomes disputed.

In plain language: Lists the conditions precedent the borrower must satisfy before each drawdown — such as delivery of a drawdown notice, no existing default, and accuracy of representations.

Common mistake: Listing conditions precedent that are impossible to satisfy at the first drawdown — such as requiring audited financials for a newly formed entity — which inadvertently blocks the initial funding.

In plain language: Sets out the exact dates and amounts of principal repayments, the final maturity date, and the borrower's right (if any) to prepay voluntarily.

Common mistake: Omitting a prepayment premium or make-whole provision when the lender's funding is fixed-rate. Allowing free prepayment on a fixed-rate facility exposes the lender to reinvestment risk with no contractual remedy.

In plain language: Statements of fact made by the borrower at signing and repeated at each drawdown — confirming legal capacity, no litigation, accurate financials, and no undisclosed liabilities.

Common mistake: Using representations that are undated or not repeated at each drawdown, allowing the borrower's circumstances to deteriorate between signing and funding without the lender having a contractual basis to refuse the advance.

In plain language: Ongoing obligations the borrower must fulfil (affirmative) or refrain from (negative) during the life of the loan — covering financial ratios, dividend restrictions, additional indebtedness, and asset disposal.

Common mistake: Setting financial covenant thresholds — particularly DSCR and leverage ratios — without headroom modelling against the borrower's actual projections, resulting in technical defaults in the first reporting period.

In plain language: Defines the specific triggers that give the lender the right to accelerate the loan, enforce security, and exercise other remedies.

Common mistake: Including cross-default provisions that reference undefined 'financial indebtedness' without a materiality threshold. A cross-default clause with no floor amount means a trivial default on a $1,000 trade payable can trigger the entire credit facility.

In plain language: Describes the assets pledged as security for the loan — fixed and floating charges, personal guarantees, or specific asset pledges — and the steps required to perfect the security interest.

Common mistake: Failing to specify perfection steps and timelines. An unperfected security interest is unenforceable against third-party creditors — including a trustee in bankruptcy — regardless of what the credit agreement says.

In plain language: Lists all lender fees payable by the borrower — arrangement fee, commitment fee on undrawn amounts, agency fee, and any exit or prepayment fees.

Common mistake: Omitting the commitment fee on the undrawn portion of a revolving facility — lenders price in the cost of holding capital available and omitting this term understates the true cost of the facility.

In plain language: Specifies which jurisdiction's law governs the agreement and how disputes are resolved — litigation, arbitration, or a hybrid — and each party's submission to jurisdiction.

Common mistake: Selecting a governing law jurisdiction with no connection to either party or the transaction. Courts in the chosen jurisdiction may decline to enforce the agreement or apply their own conflict-of-laws rules to override the parties' choice.

A credit agreement is a legally binding contract between a lender and a borrower that establishes the full terms of a loan or credit facility — including the principal amount, interest rate, repayment schedule, financial covenants, events of default, security, and the lender's remedies if the borrower fails to perform. It is the foundational document for most commercial lending relationships and is more detailed than a simple promissory note.

A promissory note is a short-form document in which the borrower unconditionally promises to repay a sum with interest — it records the obligation but typically lacks covenants, representations, security provisions, or detailed default mechanics. A credit agreement is the comprehensive governing document covering all of those elements. For commercial loans above a modest threshold, lenders typically require both: the credit agreement governs the relationship and the promissory note evidences the debt.

The most common financial covenants are a Debt Service Coverage Ratio (DSCR, typically a minimum of 1.20x–1.25x), a leverage ratio (total debt to EBITDA, often capped at 3.0x–4.0x), a minimum liquidity or cash balance requirement, and a restriction on capital expenditure above a specified annual threshold. Financial covenants are tested quarterly against the borrower's management accounts and annually against audited financials.

A covenant breach is typically an event of default, giving the lender the right to accelerate the loan and demand immediate repayment of all outstanding principal and interest. In practice, lenders often issue a waiver letter rather than accelerate — particularly for a first breach with a credible cure plan — but the waiver process is time-consuming, expensive, and may involve tightened terms or increased margins. Building headroom into covenant levels at the outset avoids this outcome.

In most jurisdictions, a credit agreement signed by authorized representatives of both parties is generally enforceable without notarization. However, if the agreement involves a mortgage, charge over real property, or security interests in certain asset classes, local registration or notarization requirements may apply — particularly in civil-law countries in continental Europe and Latin America. Consider consulting a lawyer in the relevant jurisdiction before execution.

Lenders commonly take a fixed charge over specific high-value assets (real property, major equipment, intellectual property), a floating charge over the borrower's general asset pool (receivables, inventory, cash), personal guarantees from directors or shareholders, and share pledges over the borrower's holding company. The security package is negotiated based on the loan size, the borrower's asset base, and the lender's risk appetite. All security interests must be perfected by filing or registration to be enforceable against third parties.

An event of default is any defined trigger that gives the lender the right to accelerate the loan and enforce its security. Common events of default include failure to pay any amount when due (subject to a short grace period), breach of a representation or covenant, insolvency or bankruptcy proceedings, a material adverse change in the borrower's condition, and cross-default to other financial obligations above a threshold amount. Not every default leads to acceleration — lenders often prefer to issue waivers and negotiate amendments when the borrower remains viable.

Yes — shareholder loans, intercompany loans, and loans from directors to their companies are all documented with a credit agreement or a simplified variant of one. Related-party loan agreements typically omit complex security and covenant provisions but must still clearly state the principal, interest rate (even if zero — a zero-rate loan has tax implications in most jurisdictions), repayment terms, and subordination provisions if senior debt is also outstanding.

For commercial loans, legal review is strongly recommended. The interaction between covenant mechanics, default triggers, and security perfection requirements is jurisdiction-specific and technically complex. A template is appropriate for straightforward bilateral term loans where both parties are commercially sophisticated — but any facility above $250,000, any cross-border transaction, or any deal involving real property security warrants at minimum a 2–3 hour lawyer review of the completed template before signing.