What Is A Credit Facility Agreement?
Credit facility agreements are contracts surrounding a credit facility provided to a loanee by a lender, e.g. by a bank to a company. The contract details the product provided by the lender and the conditions that must be met by the loanee such as the repayment structure, the late/early repayment fees, the interest rates, the seniority of the loan, the security of the loan and the length of the agreement.
Repayment conditions can be quite complex affairs. There are many factors to consider when repayment agreements are being fleshed out. The terms of repayment can include regular, agreed payments, minimum payments, upfront payments, the interest rate of the loan depending on the amount borrowed, whether the interest rate is fixed or variable and a final date by which all repayments must be made. The repayment conditions will vary largely from loan type to loan type and between types of companies applying for the loans. For example, revolving credit facilities may have very relaxed, ongoing repayment dates. In a similar vein, companies with whom the financial institution has a good relationship may receive very favorable rates, lower fees for early repayments or even improved opportunities for waived fees.
It is important to stipulate specific legal commitments in various scenarios concerning loan agreements. What happens in the case that the company goes into liquidation for example? If the company has multiple loans, what order must it pay them back in? The legal terms of the credit facility agreement will fastidiously detail what the company’s responsibilities are given certain outcomes. Usually, this primarily concerns the seniority of the loan – i.e. will the lender be able to claim repayment against a specific asset before other lenders with less secured agreements with the company have access to its remaining capital? Also covered here are agreed penalties that the company will have to pay to the lender in the case of missed payments or ‘defaults’. These can be variable in nature; they might depend upon the number of times the company has defaulted and or on the amount of the outstanding loan at that point.
Costs And Waivers
Finally, the costs of the loan will be detailed. Depending on the type of loan facility, the type of financial institution lending it and the security of the facility, there may be up front fees for agreeing it. These might be flat fees for the service, deposits to insure potential defaults down the line and indeed conditions under which the fees might be waived or returned (e.g. reaching the end of the loan term without borrowing above a certain percentage of the limit or completing all repayments on time). Also specified here will be the specific interest rates or ranges of interest rates relating to the loan period, which may or may not be dependent on the proportion of the loan that has been drawn down at various points of the facility’s lifetime.
Credit facility agreements are legal documents insuring the interests of both parties. They are drawn up by credit specialists and often overseen by an attorney.