Financing Agreement Template

In plain language: Identifies the lender and borrower as legal entities, states the total approved facility amount, and restricts the use of funds to a defined purpose.

Common mistake: Describing the purpose vaguely — e.g., 'general business purposes' — when the facility is tied to a specific asset or project. Lenders lose the ability to enforce security tied to that asset if the purpose clause does not link them.

In plain language: Sets out how the borrower requests funds, how much notice is required, and what documents or conditions must be satisfied before each advance is made.

Common mistake: No conditions precedent on drawdown. Without them, the lender is legally obligated to advance funds even if the borrower's financial condition has deteriorated materially since signing.

In plain language: States whether the rate is fixed or floating, the reference rate for floating arrangements, the day-count convention, and whether interest compounds or accrues simply.

Common mistake: Omitting the day-count convention. 'Actual/365' and '30/360' produce materially different interest amounts over a multi-year facility — the discrepancy compounds and can lead to underpayment disputes.

In plain language: Defines the repayment structure — equal installments, bullet maturity, or a custom amortization — and sets the final maturity date by which all outstanding amounts must be repaid.

Common mistake: No maturity date, only a repayment schedule. If the borrower misses payments and the schedule slips, there is no backstop date on which the entire debt falls due without an explicit maturity clause.

In plain language: Identifies the assets pledged as security, the type of security interest granted, and the borrower's obligation to perfect and maintain that security.

Common mistake: Describing collateral in broad, unspecific language — 'all assets of the borrower' — without identifying the specific assets and their location. Vague collateral descriptions can be defeated by competing creditors who filed against specific identified assets.

In plain language: Ongoing obligations the borrower must satisfy throughout the facility — maintaining minimum financial ratios, providing periodic reporting, and restricting certain actions without lender consent.

Common mistake: Setting covenants but no testing frequency or cure period. A covenant without a defined testing date is unenforceable, and a covenant without a cure period forces immediate default for minor, correctable breaches.

In plain language: A set of factual statements the borrower makes at signing — and typically repeats at each drawdown — about its legal existence, authority to borrow, solvency, and absence of undisclosed litigation or liabilities.

Common mistake: Static representations that are given only at signing and not repeated at drawdown. If the borrower's financial condition deteriorates between signing and drawing the second tranche, a bring-down requirement gives the lender the right to refuse the advance.

In plain language: Lists the specific triggers that constitute a default — payment failure, covenant breach, insolvency, misrepresentation, cross-default — and the cure periods, if any, before the lender may exercise remedies.

Common mistake: No cure period on payment default. Triggering acceleration and security enforcement after a single missed payment — with no grace period — is disproportionate and may be unenforceable or generate court sympathy for the borrower.

In plain language: Sets out what the lender may do on an uncured event of default — declare the full balance immediately due, enforce its security interest, appoint a receiver, or sue for damages.

Common mistake: Omitting the self-help remedies — possession of collateral and sale — and relying solely on 'sue for damages.' Without explicit enforcement rights, the lender may need court approval at every step, delaying recovery significantly.

In plain language: Specifies the jurisdiction whose laws govern interpretation of the agreement and how disputes between the parties will be resolved — litigation, arbitration, or mediation first.

Common mistake: Choosing a governing law jurisdiction with no connection to the borrower's operations or the collateral's location. Courts in several jurisdictions will apply local law regardless — particularly for security enforcement over real or personal property located there.

A financing agreement is a legally binding contract that documents the terms under which a lender advances capital to a borrower for a defined purpose — such as acquiring an asset, funding a project, or supporting business operations. Unlike a simple promissory note, a financing agreement includes collateral provisions, financial covenants, drawdown mechanics, representations and warranties, and detailed default remedies, making it the appropriate instrument for structured or multi-draw capital arrangements.

A loan agreement typically documents a single advance of a fixed sum with a straightforward repayment schedule and limited conditions. A financing agreement is broader — it may cover multi-draw facilities, project-linked disbursements, complex security packages, ongoing financial covenants, and cross-default linkages to other debt. Think of a loan agreement as a simple point-to-point instrument and a financing agreement as the full legal framework for a structured credit facility.

Common collateral types include personal property (equipment, inventory, accounts receivable), real property (land and buildings), financial assets (bank accounts, securities), and intellectual property rights. The type of collateral determines how the security interest is perfected — UCC-1 filing for personal property in the US, charge registration in Canada and the UK, or mortgage recording for real estate. Each asset type requires a jurisdiction-specific perfection step to establish priority over competing creditors.

The most common financial covenants are a minimum Debt Service Coverage Ratio (typically 1.20× or higher), a maximum leverage ratio (total debt divided by EBITDA), a minimum liquidity covenant (unrestricted cash above a set floor), and a minimum net worth requirement. Operational covenants often include restrictions on additional indebtedness, asset disposals, dividends, and change of control without lender consent. The specific covenants depend on the borrower's industry, asset base, and the structure of the facility.

On an uncured event of default, the lender typically has the right to declare the entire outstanding balance — principal, accrued interest, and fees — immediately due and payable (acceleration), enforce its security interest over the collateral, appoint a receiver over the borrower's business or specific assets, and sue for damages. Most agreements include cure periods — typically 5 business days for payment defaults and 30 days for covenant breaches — before these remedies can be exercised.

Notarization is not required for most commercial financing agreements to be enforceable. However, mortgage-backed facilities over real property typically require notarization and recording at the relevant land registry to achieve the priority status needed to enforce against third parties. In some US states, a notarized signature is required for a UCC fixture filing to attach to real property. Check the requirements for the specific collateral type and jurisdiction before execution.

Yes. A seller-financed business acquisition is one of the most common uses. The seller acts as lender, the buyer as borrower, and the financed amount represents the portion of the purchase price deferred rather than paid at closing. The agreement should include a security interest over the acquired business assets, a personal guarantee from the buyer if appropriate, and an acceleration clause tied to the buyer's failure to operate the business in a commercially reasonable manner.

A financing agreement is a pure debt instrument — the borrower repays principal and interest on a defined schedule. A convertible note is a hybrid instrument that starts as debt but includes an option or obligation to convert the outstanding balance into equity at a future triggering event, such as a qualifying funding round. Startups use convertible notes to defer the valuation discussion; most other borrowers use a straight financing agreement because they are not offering equity.

For straightforward single-advance arrangements between two parties with simple collateral, a well-drafted template reviewed by a lawyer is typically sufficient. Engage a lawyer directly when the facility exceeds $500K, involves real property collateral, spans multiple jurisdictions, includes complex covenant packages, or is part of a larger acquisition or project financing structure. A 2–3 hour legal review of a completed template typically costs $500–$1,200 and is worthwhile for any secured facility above $100K.