Line Of Credit Agreement Template

In plain language: Identifies the lender and borrower as legal entities, states the purpose of the facility, and defines every capitalized term used throughout the agreement.

Common mistake: Using trade names instead of registered legal entity names. If the entity name on the agreement doesn't match the security filing or bank records, enforcing the security interest or pursuing recovery becomes procedurally complicated.

In plain language: States the maximum credit limit, how availability is calculated, and any borrowing base or concentration limits that reduce what the borrower can draw.

Common mistake: Omitting a borrowing base formula when the facility is tied to receivables or inventory. Without one, the lender has no contractual mechanism to reduce availability as the collateral base shrinks.

In plain language: Specifies how the borrower requests a draw — the required notice period, minimum advance amounts, the form of the advance request, and the lender's disbursement timeline.

Common mistake: Leaving the advance procedure silent on what happens if the lender disputes the request. Without a defined cure or dispute process, a rejected advance becomes an immediate litigation trigger.

In plain language: Sets the applicable interest rate — fixed or floating — the benchmark it is tied to, the spread, and the day-count convention used to calculate accrued interest.

Common mistake: Failing to include a benchmark replacement provision. If the named benchmark (e.g., SOFR) is discontinued, the agreement needs a fallback rate — otherwise reprice negotiations become contentious or legally ambiguous.

In plain language: Lists every fee the borrower owes the lender: commitment fee on the undrawn balance, origination fee, annual renewal fee, and any prepayment or early-termination fee.

Common mistake: Omitting the commitment fee entirely on small private facilities. Lenders who skip it lose compensation for holding capital available during periods when the borrower draws nothing.

In plain language: Defines the repayment mechanics — interest-only or principal-plus-interest — the clean-up period requirement, and the final maturity date on which all outstanding amounts become due.

Common mistake: No clean-up period on a working-capital facility. Without one, a short-term line quietly converts into permanent financing, and the lender loses the legal and tax distinction between the two.

In plain language: Requires the borrower to maintain certain financial ratios, provide periodic reporting, and carry insurance (affirmative); and prohibits additional indebtedness, asset sales, or change of control without lender consent (negative).

Common mistake: Setting financial covenants without headroom above current ratios. A covenant set at the borrower's exact current ratio triggers default on the first quarter of any softness, even if the underlying business is healthy.

In plain language: Lists the specific events — missed payment, covenant breach, insolvency, material misrepresentation — that constitute a default, and grants the lender the right to accelerate the loan and enforce security.

Common mistake: No cure period for covenant breaches. Automatic default on a first technical breach — with no opportunity to remedy — is commercially unreasonable and courts may decline to enforce accelerated remedies on that basis.

In plain language: Describes the assets pledged as collateral, the lender's security interest, and the borrower's obligation to execute and register any documents needed to perfect that interest.

Common mistake: Describing collateral broadly ('all assets') without perfecting the security interest through a UCC-1 filing or PPSA registration. An unperfected security interest is treated as unsecured in bankruptcy proceedings.

In plain language: Specifies which jurisdiction's law governs the agreement, where disputes are resolved, and the required method and address for formal notices between parties.

Common mistake: Choosing governing law with no connection to where the borrower operates or where the collateral is located. Courts may decline to apply a chosen law when it has no meaningful nexus to the transaction, leaving both parties uncertain about which rules apply.

A line of credit agreement is a legally binding contract between a lender and a borrower that establishes a revolving credit facility — setting the maximum amount the borrower can draw, the interest rate, the advance and repayment mechanics, covenants, fees, and termination conditions. Unlike a term loan, which disburses a lump sum, a line of credit allows the borrower to draw, repay, and redraw up to the commitment limit repeatedly during the facility term, making it well-suited for working-capital and seasonal financing needs.

A loan agreement typically documents a single lump-sum disbursement with a fixed repayment schedule — the borrower draws all funds at closing and repays on a set amortization. A line of credit agreement establishes a revolving facility where the borrower draws and repays multiple times up to a maximum commitment. Interest accrues only on the outstanding balance, making a line of credit more flexible and often less costly for businesses with fluctuating cash-flow needs.

At minimum: the parties' legal names, maximum commitment amount, interest rate and benchmark, advance request procedure, repayment terms and maturity date, clean-up period, fees (origination, commitment, renewal), affirmative and negative covenants, events of default with cure periods, collateral description, perfection requirements, and governing law. Missing any of these creates gaps that become expensive to resolve if the borrower defaults or the relationship sours.

Not always — unsecured lines of credit exist, particularly for borrowers with strong credit profiles or in inter-company arrangements. However, most commercial lines are secured by a first-priority interest in accounts receivable, inventory, or general business assets. A secured facility gives the lender priority over those assets in a bankruptcy and typically allows a higher commitment amount or lower interest rate. If secured, the security interest must be perfected through a UCC-1 or PPSA filing to be enforceable against third parties.

A clean-up period requires the borrower to reduce the outstanding balance to zero for a specified number of consecutive days — typically 30 — at least once per year. It confirms the facility is being used for short-term working-capital purposes rather than as permanent financing. Lenders and auditors use the clean-up period to distinguish revolving credit from term debt, which affects how the liability is classified on the borrower's balance sheet and how the lender assesses credit risk on renewal.

Most USD commercial lines are priced at a spread over SOFR (Secured Overnight Financing Rate) or Prime Rate — for example, SOFR plus 2.50% or Prime plus 1.00%. Fixed rates are used for shorter-term or private lender facilities where simplicity is preferred. Whichever benchmark is chosen, the agreement should include a benchmark replacement provision in case the rate is discontinued, specifying a fallback calculation method and the party responsible for determining the replacement rate.

Affirmative covenants typically require the borrower to deliver quarterly financial statements, maintain minimum insurance coverage, preserve required business licenses, and pay taxes when due. Negative covenants commonly restrict additional indebtedness above a threshold, asset sales without lender consent, dividends or owner distributions while the line is drawn, and change-of-control transactions. Financial maintenance covenants — such as a minimum debt service coverage ratio or maximum leverage ratio — are common on larger or secured facilities.

A well-drafted template is generally enforceable when properly executed by both parties. However, enforceability of specific provisions — particularly security interests, cross-default clauses, and financial covenants — depends on jurisdiction-specific rules that a template alone may not fully address. Legal review is strongly recommended for facilities above $100,000, for borrowers with complex capital structures, or when the lender intends to rely on the security interest in an insolvency scenario.

Termination typically occurs in one of three ways: the facility matures on its stated maturity date and all outstanding amounts are repaid; the borrower voluntarily terminates by repaying the full balance and providing written notice; or the lender accelerates and demands full repayment following an uncured event of default. Upon termination, the lender should file a UCC-3 termination statement (US) or discharge the PPSA registration (Canada) to release the security interest from public record.