Anatomy of a Loan Agreement: Defined Terms, Affirmative/Negative Covenants, Events of Default, Reps and Warranties

Description

There are many sources from which business borrowers can borrow money and obtain credit. The two basic categories of financing are secured and unsecured and there are several different financing methods. Loan agreements represent the formal contract between the borrower and lender and are designed to: (1) focus the parties’ attention on issues material to the making and management of the credit; (2) explain the loan transaction and the parties’ understanding of their agreement; and (3) protect the rights of the parties. The choice of loan documentation depends on several factors and may consist of a lender’s “standard” form, a negotiated loan agreement, a letter agreement, or some combination of these.

There are common terms and conditions found in every debt financing instrument that relate to how the borrower uses the funds and conducts its business until the debt is paid. Generally, loan agreements contains the following sections: the preamble which describes the agreement and identifies the parties; the recitals which describe the loan transaction; definitions; description of the credit facility being made to the borrower by the lender; representations and warranties regarding factual matters material to the protection of the lender’s interests; conditions that must be satisfied by the borrower before the lender is obligated to make any advances; covenants regarding the requirements and restrictions the lender imposes upon the borrower to ensure the borrower makes timely payments; events of default and miscellaneous “housekeeping” provisions.

Listen as our expert panel provides an overview of the sections of a loan agreement and explains what the terms mean, how they work, and what happens if either party fails to meet the terms of the agreement. The panel will also provide tips for negotiating various loan terms depending on whether your client is the borrower or the lender.