Credit Agreement

A Credit Agreement in the United States sets the principal, interest, repayment schedule and security governing a loan between lender and borrower.

The legal framework governing Credit Agreements operates at multiple levels. The Truth in Lending Act (TILA), 15 U.S.C. § 1601, implemented by the Consumer Financial Protection Bureau's Regulation Z (12 CFR Part 1026), requires mandatory disclosures in consumer Credit Agreements, including the Annual Percentage Rate (APR), finance charges, total of payments, and payment schedule. For commercial Credit Agreements between sophisticated business parties, TILA's consumer protection requirements generally do not apply, and the parties have substantial freedom to negotiate terms. The Uniform Commercial Code (UCC) Article 9 governs security interests created by a Credit Agreement to secure repayment, and Article 3 governs promissory notes that may be executed alongside the Credit Agreement.

A Credit Agreement differs from a Promissory Note in scope and purpose. A Promissory Note is a standalone negotiable instrument under UCC § 3-104 that contains the borrower's unconditional promise to pay a fixed amount on demand or at a definite time. A Credit Agreement is a more complete document that, in addition to the payment obligation, contains representations and warranties by the borrower, affirmative and negative covenants restricting the borrower's conduct during the credit period, conditions precedent to each draw, events of default and remedies, and administrative provisions governing the lender-borrower relationship.

Commercial Credit Agreements for institutional loans — syndicated credits, leveraged buyout financings, and investment-grade revolving credit facilities — are among the most complex legal documents in US business practice. The Loan Syndications and Trading Association (LSTA) publishes widely used model credit agreement provisions for the US leveraged loan market. Smaller commercial Credit Agreements for middle-market borrowers in California, New York, Texas, and Florida follow comparable but simpler structures.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 2010) added the Consumer Financial Protection Bureau's supervisory authority over large non-bank lenders and imposed additional requirements on certain consumer Credit Agreements. For small business Credit Agreements, the Small Business Administration (SBA) loan programs under 13 CFR Part 120 impose specific documentation requirements for SBA 7(a) and 504 loans, including standardized note and security agreement forms.

A US Credit Agreement is needed any time a lender provides a revolving or term credit facility to a borrower — whether in a consumer, small business, or commercial context — and the parties want a document more complete than a simple Promissory Note.

A Credit Agreement is required when a community bank or regional bank in California, Texas, New York, or Florida extends a revolving line of credit to a small or mid-sized business for working capital purposes. The Credit Agreement governs the conditions under which the borrower may draw on the line, the interest rate methodology (typically a floating rate tied to the Prime Rate or SOFR, the Secured Overnight Financing Rate that replaced LIBOR), the borrowing base (for asset-based revolvers, the advance rate against eligible accounts receivable and inventory), and the financial covenant obligations of the borrower.

For commercial real estate lending, a Credit Agreement is used alongside a Deed of Trust or Mortgage and a separate promissory note to document construction loans, bridge loans, and permanent financing facilities. The Credit Agreement governs conditions to each draw on a construction loan, retainage provisions, and the mechanics of converting from a construction loan to a permanent loan upon completion and lease-up.

In the private equity and leveraged buyout context, Delaware-incorporated acquisition vehicles use Credit Agreements to document senior secured credit facilities provided by private credit funds and banks to finance acquisitions. These Credit Agreements incorporate detailed EBITDA-based financial maintenance covenants, springing financial covenants, and basket provisions negotiated by Kirkland & Ellis, Latham & Watkins, and other leading M&A law firms.

Family loans and private-party lending transactions benefit from a written Credit Agreement even when the lender and borrower are related individuals. A written Credit Agreement establishing an arm's-length interest rate at or above the IRS applicable federal rate (AFR) published monthly under IRC § 7872 prevents the IRS from recharacterizing the loan as a gift subject to gift tax under IRC § 2501. California, New York, and Texas courts also recognize written Credit Agreements as evidence of genuine debt — important if the borrower later files for bankruptcy and the lender seeks to assert a claim against the bankruptcy estate.

A complete US Credit Agreement must contain a specific set of provisions to be legally effective, commercially workable, and defensible in enforcement proceedings. The following elements are standard in professionally prepared commercial and consumer Credit Agreements.

The credit facility description and amount clause defines the type of facility (revolving credit, term loan A, term loan B, delayed-draw term loan, or letter of credit facility), the maximum commitment amount, the availability period, and the maturity date. For revolving credits, the clause specifies the borrowing base formula (if any), the minimum draw amount, and the frequency with which draws may be requested.

The interest rate and payment terms clause specifies the applicable interest rate — whether a fixed rate, a floating rate based on SOFR plus a margin, or the Prime Rate as published by the Wall Street Journal — the interest payment frequency (monthly, quarterly, or accruing until maturity), any default interest rate applicable after an Event of Default (typically the regular rate plus 2%-5%), and the method for calculating interest (actual/360 or actual/365).

The representations and warranties clause contains the borrower's factual certifications made as of the date of the Credit Agreement and as of each draw: that the borrower is duly organized and in good standing in its state of formation; that the credit facility is within the borrower's authority and has been properly authorized; that no material adverse change has occurred in the borrower's business or financial condition since the most recent financial statements; that there is no pending or threatened litigation materially affecting the borrower; and that the borrower is not in violation of any applicable law, including environmental laws under the Complete Environmental Response, Compensation, and Liability Act (CERCLA, 42 U.S.C. § 9601).

The affirmative covenants clause requires the borrower to maintain its corporate existence, preserve its assets, pay all taxes and assessments before delinquency, maintain required insurance coverage, provide quarterly and annual financial statements to the lender within specified periods, and notify the lender promptly of any Event of Default or material adverse change.

The negative covenants clause prohibits the borrower from taking specified actions without the lender's prior written consent, including incurring additional indebtedness above a stated basket, creating liens on its assets (other than permitted liens), making acquisitions above a stated dollar threshold, paying dividends or making distributions to equity holders, and making fundamental changes to its business.

The events of default and remedies clause identifies the circumstances — payment default, covenant breach, representation misrepresentation, cross-default, insolvency, and change of control — that entitle the lender to accelerate the outstanding balance and enforce its security interest under UCC Article 9. For real property security, the lender may foreclose under the applicable state's mortgage or deed of trust law.