Commercial Loan Agreement

A Commercial Loan Agreement in the United States records the terms on which money is advanced and must be repaid, including default consequences.

Commercial loans differ from consumer loans in several legally significant ways. Consumer loans — personal mortgages, auto loans, credit cards — are subject to federal consumer protection statutes including the Truth in Lending Act (TILA, 15 U.S.C. § 1601 et seq.) and the Equal Credit Opportunity Act (ECOA, 15 U.S.C. § 1691 et seq.), which impose mandatory disclosure requirements, cooling-off periods, and anti-discrimination rules. Commercial loans to business entities are generally exempt from TILA disclosure requirements under 12 CFR § 226.3(a)(1) and from the Equal Credit Opportunity Act's adverse action requirements where credit is extended primarily for business purposes under 15 U.S.C. § 1691a(b). State usury laws — which cap interest rates on loans — typically have much higher ceilings for commercial loans than for consumer loans; Delaware, New York, and several other states have no usury ceiling for loans to corporations at all.

The legal framework for perfecting security interests in personal property collateral is Article 9 of the UCC, as adopted in all 50 states and the District of Columbia. Under UCC Article 9 § 9-310, a lender must file a UCC-1 Financing Statement with the Secretary of State's office in the state where the debtor (borrower) is organized in order to perfect its security interest in personal property collateral — accounts receivable, inventory, equipment, and general intangibles. A properly filed UCC-1 gives the lender priority over subsequently perfected creditors and over the borrower's bankruptcy trustee with respect to the described collateral.

For real property collateral, the lender records a mortgage or deed of trust in the county recorder's office (or register of deeds) in the county where the property is located, under the applicable state recording statute. Priority among competing mortgages and deeds of trust is generally determined by the order of recording — the first-in-time, first-in-right principle — subject to the recording act type (race-notice, notice, or race statutes) adopted by the particular state.

The Secured Overnight Financing Rate (SOFR), administered by the Federal Reserve Bank of New York, has largely replaced the London Inter-Bank Offered Rate (LIBOR) as the benchmark rate for variable-rate commercial loans following LIBOR's discontinuation in June 2023. The Alternative Reference Rates Committee (ARRC) — convened by the Federal Reserve and the Federal Reserve Bank of New York — published recommended fallback language for LIBOR-referencing commercial loan agreements under the Adjustable Interest Rate (LIBOR) Act of 2021 (15 U.S.C. § 5801 et seq.).

A US Commercial Loan Agreement is needed whenever a business borrows money from a lender for business purposes and both parties need a legally enforceable document establishing the terms of repayment, the collateral securing the loan, and the consequences of default.

Small business equipment financing — for restaurant equipment, manufacturing machinery, commercial vehicles, medical equipment, or construction equipment — typically uses a commercial loan agreement or equipment finance agreement secured by the purchased equipment under UCC Article 9. The Small Business Administration (SBA) 7(a) loan program, which guarantees commercial loans made by approved lenders to eligible small businesses under 15 U.S.C. § 636(a), requires a loan agreement that meets SBA Standard Operating Procedure (SOP) 50 10 requirements.

Real estate acquisition and construction financing for commercial properties — office buildings, retail centers, industrial warehouses, multifamily apartment complexes — requires a commercial mortgage loan agreement secured by the real property under a mortgage or deed of trust. Construction loans typically disburse funds in draws tied to completion of specified construction milestones, with a conversion to a permanent mortgage upon project completion.

Working capital lines of credit for businesses with seasonal or cyclical cash flow requirements — retailers, contractors, agricultural operations — use a revolving commercial loan agreement (line of credit agreement) secured by a blanket lien on the borrower's current assets (accounts receivable and inventory) under a UCC Article 9 security agreement. The Borrowing Base Certificate mechanism — requiring periodic certification of the eligible receivables and inventory supporting the line of credit — is a standard feature of asset-based lending arrangements.

Acquisition financing for leveraged buyouts (LBOs), management buyouts (MBOs), and business acquisitions by private equity sponsors uses sophisticated commercial loan agreements with detailed financial covenant packages, intercreditor agreements among multiple lenders (senior, mezzanine, and subordinated), and change-of-control provisions. These transactions frequently involve New York law and New York courts — the Southern District of New York and the New York Court of Appeals — as the governing law and jurisdiction.

Bridge loans — short-term commercial loans used to finance a transaction while permanent financing is arranged — require a loan agreement that clearly specifies the maturity date, the conditions under which the loan may be extended, the exit fee or prepayment premium, and the events that constitute a default and trigger acceleration.

A complete US Commercial Loan Agreement contains the following essential provisions that define the legal obligations of the borrower and lender, and establish the remedies available if those obligations are not met.

The loan amount and disbursement clause specifies the principal amount of the loan, the conditions precedent to disbursement (such as delivery of executed loan documents, evidence of insurance, and UCC filing receipt), the method of disbursement (wire transfer to the borrower's designated account), and for construction or multiple-draw loans, the conditions and documentation required for each draw request.

The interest rate and payment terms clause specifies whether the rate is fixed or variable (floating), the index and spread for a variable rate (e.g., SOFR plus 2.50% per annum, adjusted monthly), the default interest rate applicable upon an event of default (typically the contract rate plus 3% to 5%), the payment schedule (monthly, quarterly, or interest-only with a balloon payment at maturity), and the day count convention (actual/360 or actual/365) used to calculate accrued interest. The clause must include a usury savings provision confirming that no interest will exceed the maximum rate permitted by applicable state or federal law.

The collateral and security interest clause describes the collateral securing the loan and the type of security instrument used. For personal property collateral, the clause references the Security Agreement and obligates the borrower to execute a UCC-1 Financing Statement. For real property collateral, the clause references the Mortgage or Deed of Trust. The description of collateral should be specific enough to satisfy UCC § 9-108's requirement that the collateral be described with reasonable specificity.

The representations and warranties clause contains the borrower's factual statements about its legal status, authority to enter the loan agreement, financial condition, absence of material litigation, and compliance with applicable laws as of the closing date. Breaches of representations and warranties are typically events of default that allow the lender to accelerate the loan.

The affirmative and negative covenants clause establishes ongoing obligations throughout the life of the loan. Affirmative covenants require the borrower to maintain insurance, pay taxes, keep books and records, provide financial statements (monthly, quarterly, or annual depending on the loan size), and maintain required licenses. Negative covenants prohibit the borrower from incurring additional debt above a threshold, making capital expenditures above a specified amount, paying dividends or distributions without lender consent, selling or encumbering assets without consent, or undergoing a change of control without triggering a mandatory prepayment or consent requirement.

The financial covenants clause quantifies the financial performance thresholds the borrower must maintain, such as a minimum Debt Service Coverage Ratio (DSCR) of 1.25x, a maximum Total Leverage Ratio, or a minimum liquidity amount. Financial covenant compliance is tested quarterly or annually based on the borrower's financial statements, and breach of a financial covenant is an event of default subject to a defined cure period.

The events of default and remedies clause defines the specific events that constitute a default — payment default after a grace period, covenant breach, bankruptcy filing, material adverse change, cross-default under other debt instruments — and the lender's remedies upon default, including acceleration, enforcement of the security interest under UCC Article 9, mortgage foreclosure, and lawsuit against the borrower and any personal guarantors.