Line of Credit Agreement Template

In plain language: Identifies the lender and borrower by full legal name, establishes the purpose of the credit facility, and defines every capitalized term used throughout the agreement.

Common mistake: Using trade names instead of full registered legal entity names. If the named party doesn't match the executing entity, the agreement may be unenforceable against the intended party.

In plain language: Sets the maximum amount the borrower may have outstanding at any time and explains how availability is calculated as repayments are made.

Common mistake: Failing to specify whether the facility is revolving or non-revolving. The distinction determines whether repaid amounts can be re-borrowed — an omission that triggers disputes when the borrower tries to draw again.

In plain language: States how and when the borrower may request funds — including notice period, minimum draw amount, and any conditions precedent (such as no existing event of default).

Common mistake: Setting no minimum draw amount or notice period. Without these, the lender faces operational friction from micro-draws and same-day funding demands that create processing and liquidity problems.

In plain language: Specifies the interest rate applicable to drawn balances — fixed or floating — the calculation basis (360 or 365 days), and when interest accrues.

Common mistake: Referencing LIBOR in new agreements. LIBOR was discontinued at end of June 2023. All floating-rate credit agreements must reference SOFR (US), SONIA (UK), or €STR (EU) — or another agreed replacement benchmark.

In plain language: Defines when and how the borrower must repay drawn amounts — monthly interest-only, minimum principal payments, or full repayment at maturity — and whether early repayment is permitted.

Common mistake: No prepayment provision at all. If the agreement is silent on prepayment, whether the borrower can repay early without penalty is unclear — creating disputes when the borrower tries to reduce their balance.

In plain language: Lists all fees payable under the facility — commitment fee, facility fee, draw fee, late payment fee — with amounts, calculation basis, and due dates.

Common mistake: Omitting a late payment fee or setting it too low. Without a meaningful late fee, there is no financial incentive for the borrower to pay on time — and no contractual remedy short of declaring a full event of default.

In plain language: Sets affirmative obligations (e.g., deliver financial statements, maintain insurance, pay taxes) and negative restrictions (e.g., no additional debt above a threshold, no asset sales without consent) on the borrower while the facility is outstanding.

Common mistake: Using financial covenants without defining the calculation method precisely. A covenant requiring a 1.25x DSCR is meaningless without specifying whether EBITDA, operating income, or cash flow from operations forms the numerator.

In plain language: Enumerates specific triggering conditions — missed payment, covenant breach, insolvency, material adverse change — that entitle the lender to accelerate the balance and pursue remedies.

Common mistake: No cure period for covenant breaches. An instant default on any covenant breach — without a notice-and-cure window — gives lenders disproportionate power and may be challenged as unconscionable in some jurisdictions.

In plain language: Describes the collateral pledged to secure the line (if any), grants the lender a security interest, and specifies perfection steps such as UCC filing.

Common mistake: No collateral clause on a secured facility, or a collateral description too narrow to cover after-acquired property. An unperfected or under-described security interest leaves the lender as an unsecured creditor in a bankruptcy proceeding.

In plain language: Specifies which jurisdiction's law governs, how disputes are resolved (arbitration or litigation), and includes standard boilerplate — integration, amendment, waiver, severability, and notice provisions.

Common mistake: Choosing a governing law with no connection to where either party operates or where collateral is located. Enforcing a security interest or judgment under a foreign governing law adds cost and delay that most lenders and borrowers underestimate.

A line of credit agreement is a legally binding contract between a lender and a borrower that establishes a credit facility — typically revolving — up to a defined maximum amount. Unlike a term loan, the borrower draws only what is needed, repays it, and can borrow again up to the credit limit throughout the facility term. The agreement governs every aspect of the arrangement: draw conditions, interest rate, repayment, fees, covenants, default events, and collateral.

A loan agreement provides a fixed, lump-sum disbursement that the borrower repays on a set schedule. A line of credit agreement establishes a revolving facility the borrower can draw and repay repeatedly up to the credit limit. Interest on a line of credit accrues only on the outstanding drawn balance, not the full facility amount — making it more flexible and typically cheaper for working-capital needs where the borrower does not need the full amount at once.

Any credit facility above the threshold covered by the Statute of Frauds in the applicable jurisdiction — generally agreements not performable within one year, or involving amounts above a statutory minimum — must be in writing to be enforceable. In practice, all commercial lines of credit should be documented in a signed written agreement regardless of amount. An oral credit arrangement creates significant evidentiary and enforceability problems for both parties.

The rate depends on the parties' agreement and market conditions. Commercial bank lines of credit typically price at a floating rate — prime rate plus a spread of 1–4%, or SOFR plus a spread — with a rate floor. Private and intercompany lines often use a fixed rate. The agreement should state the rate explicitly, define the day-count convention (360 or 365 days), and include a fallback mechanism if the reference rate is discontinued. LIBOR must not be used in any new agreements as of 2023.

Collateral requirements vary by lender and borrower creditworthiness. Asset-based lines of credit are typically secured by accounts receivable, inventory, or equipment — with availability tied to a borrowing base formula (e.g., 80% of eligible receivables). Unsecured lines rely solely on the borrower's creditworthiness and often require a personal or corporate guarantee. Commercial real estate lines are secured by a deed of trust or mortgage on the property. Whatever collateral is pledged, a UCC-1 financing statement should be filed to perfect the lender's security interest.

Covenants are contractual promises the borrower makes to the lender while the facility is outstanding. Affirmative covenants require specific actions — delivering quarterly financial statements, maintaining adequate insurance, staying current on taxes. Negative covenants restrict certain actions — taking on additional debt above a threshold, selling material assets, or changing ownership structure without lender consent. Breach of a covenant triggers a default process, typically with a cure period, that can result in acceleration of the full outstanding balance if not remedied.

When an event of default occurs and is not cured within any applicable cure period, the lender typically has the right to stop funding further draws, accelerate the outstanding balance (making it immediately due in full), and enforce its security interest against pledged collateral. The agreement should specify the notice-and-cure process before acceleration is triggered. In insolvency proceedings, a secured lender with a perfected security interest has priority over unsecured creditors for recovery from the collateral.

A personal guarantee is not legally required by default but is commonly demanded by lenders when extending credit to newly formed LLCs, thinly capitalized entities, or borrowers without a strong standalone credit history. The guarantee makes one or more individual owners personally liable for the outstanding balance if the business entity defaults. Whether to require one depends on the lender's risk assessment and the borrower's negotiating position.

For straightforward facilities between a well-established business borrower and a private lender, a professionally drafted template reviewed by a lawyer is often sufficient. Engage a lawyer directly when the facility exceeds $250,000, when collateral includes real property or complex asset categories, when the borrower operates in a regulated industry, or when the agreement involves cross-border parties subject to different jurisdictions. A 2–4 hour attorney review typically costs $600–$1,500 and is worthwhile for any material facility.