A credit facility agreement is a binding contract in which a lender commits to make a pool of capital available to a borrower, up to a set maximum, over an agreed period. Instead of a single lump sum, the lender keeps capital on reserve and the borrower draws against it as needs arise. The document itself is where the real substance sits: it defines how the money flows, what the borrower must promise in return, what tests the borrower must keep passing, and what the lender can do if any of those promises break.
The Basic Structure
Every agreement has at least two parties: the borrower and the lender. In larger deals, several lenders form a syndicate, and one of them acts as the administrative agent so the borrower deals with a single point of contact for funding requests, payments, and information.
Three numbers frame the deal. The commitment amount is the maximum principal the lender is obligated to make available. The maturity date is when the outstanding balance must be repaid or refinanced. Between those, the borrower accesses capital through drawdowns, formal requests for a specific portion of the committed funds. Each drawdown typically requires a minimum amount, a notice period of two or three business days, and a certification that the borrower is still in compliance.
You pay for capital you have not yet used. The lender charges a commitment fee on the undrawn portion, generally 0.25% to 1.0% per year on a revolving facility, with stronger borrowers paying toward the low end. This compensates the bank for holding reserves it cannot lend elsewhere.
Types of Credit Facilities
Most large agreements bundle more than one type of facility into a single document, and what you are agreeing to depends heavily on which structure applies.
Revolving Credit Facility
A revolver works like a corporate credit line. The borrower can draw, repay, and draw again, repeatedly, up to the commitment amount. Repaid principal becomes available for re-borrowing immediately. This suits short-term working capital needs like seasonal inventory or bridging the gap between billing and collection. At maturity, the full outstanding balance comes due.
Term Loan
A term loan is the opposite in one critical way: once principal is repaid, it cannot be re-borrowed. The loan is drawn at closing or during a short availability window, then paid down on a fixed amortization schedule, often ending in a balloon payment at maturity. Term loans typically fund discrete capital investments (equipment, real estate, an acquisition) where the debt is retired over a horizon matching the asset’s useful life.
Delayed Draw Term Loan
A delayed draw term loan sits between the two. It gives the borrower committed access to a term loan that can be drawn in multiple installments during an availability window that often spans three to four years. Once drawn, the money behaves like a standard term loan: no re-borrowing. This structure is common in private equity deals where the sponsor knows follow-on acquisition funding will be needed but not exactly when.
Accordion (Incremental) Facility
Many agreements include an accordion that lets the borrower expand the total commitment, either as a new term tranche or an enlarged revolver, up to a pre-approved ceiling without renegotiating the whole agreement. The existing lenders have already consented to the potential increase, so the legal groundwork exists. The borrower still needs to find lenders willing to fund the incremental amount.
How Interest Is Priced
Interest is rarely a single fixed number. It is built from two components: a floating benchmark plus a fixed margin (also called a spread).
Since LIBOR’s retirement, the standard benchmark for U.S. dollar facilities is the Secured Overnight Financing Rate (SOFR), published by the Federal Reserve Bank of New York. Most syndicated loans use Term SOFR, a forward-looking version administered by CME Group, because it fixes the interest cost at the start of each interest period rather than calculating it in arrears.1CME Group. Term SOFR Some agreements use Daily Simple SOFR instead, which accrues day by day on the overnight rate.
The margin is where the lender prices the individual borrower. A financially strong, investment-grade company might pay SOFR plus 1.25%. A more leveraged borrower could pay SOFR plus 3.50% or more. Many agreements include a pricing grid that adjusts the margin up or down based on the borrower’s leverage ratio or credit rating at each measurement date, so improving financial performance literally reduces the cost of capital.
What the Borrower Certifies Before Every Draw
Before releasing capital, the lender needs assurance the borrower’s house is in order. That assurance takes the form of representations and warranties: formal statements of fact embedded in the agreement. The borrower represents that the company is legally organized and authorized to borrow, that its financial statements are accurate, that no material litigation is pending, that it is solvent, and that it complies with applicable laws. These describe the borrower’s condition at a point in time, usually the closing date and every subsequent drawdown date.
Every drawdown request effectively re-certifies those representations. The agreement also requires that no event of default exists and that funding the draw would not create one. These are conditions precedent, and if any one is not satisfied, the lender can refuse to fund.
The most consequential condition is often the material adverse change (MAC) clause. A MAC clause lets the lender decline a drawdown if the borrower has suffered a significant deterioration in its business, finances, or ability to repay. Lenders rarely invoke MAC clauses because the burden of proving materiality is real and litigation is expensive. But the clause’s existence gives the lender leverage when a borrower is struggling. A borrower approaching trouble who has not yet drawn available funds faces genuine risk that the lender will raise MAC concerns before funding.
Covenants: The Ongoing Promises
Covenants are how the lender monitors and controls risk after closing. They fall into three groups, and breaking any one, even while paying on time, can trigger a default.
Affirmative Covenants
Things the borrower must do: maintain adequate insurance, pay taxes, deliver audited annual financials, keep properties in good condition, comply with material laws. These describe basic business hygiene and rarely draw much negotiation heat.
Negative Covenants
Things the borrower cannot do without lender consent. Common restrictions include taking on additional debt above a threshold, selling material assets outside the ordinary course, making acquisitions above a specified size, paying dividends or making distributions to equity holders, and changing the fundamental nature of the business. This is where negotiations get contentious, because the borrower wants operational flexibility and the lender wants to prevent moves that increase risk.
Financial Covenants
Quantitative tests the borrower must pass, usually quarterly. The most common are a debt service coverage ratio (DSCR), which requires cash flow to exceed debt payments by a specified multiple, and a leverage ratio capping total debt against EBITDA. Some agreements add a minimum net worth test or a capital expenditure limit. These are early warning systems. A breach gives the lender a seat at the table long before the borrower actually misses a payment.
Collateral, Borrowing Base, and Personal Guarantees
Most credit facilities are secured. The borrower pledges specific assets that the lender can seize and sell if the loan goes unpaid: accounts receivable, inventory, equipment, intellectual property, real estate. The lender documents its claim through a security agreement and perfects it by filing a UCC-1 financing statement with the appropriate state authority, usually the Secretary of State. Perfection establishes priority over other creditors who may claim rights to the same assets.
When collateral is working capital, the lender often caps availability using a borrowing base. Rather than allowing access to the full commitment regardless of collateral value, the lender advances only a percentage of eligible assets. A typical formula might allow 80% of qualifying receivables and 50% of eligible inventory, though advance rates vary with collateral quality. The borrower submits borrowing base certificates, often monthly, and available credit fluctuates with the collateral pool.
Lenders also frequently require personal guarantees from the company’s owners or principals, especially in middle-market and smaller deals. A personal guarantee makes the individual personally liable for the company’s debt even if the business is a corporation or LLC that would otherwise shield the owner.2NCUA. Personal Guarantees – Examiner’s Guide These are typically joint and several, meaning the lender can pursue any one guarantor for the full amount. Lenders sometimes waive the requirement for financially strong borrowers with low leverage and strong collateral coverage, but that is the exception for privately held companies.
What Happens When Things Go Wrong
A missed payment, a covenant breach, or a failure of any other obligation constitutes an event of default. The lender’s options are much broader than simply demanding repayment.
Events of Default and Cross-Default
The agreement lists specific triggers. Beyond obvious ones like missed payments and covenant breaches, most agreements include a cross-default provision: if the borrower defaults on any other material debt, that default also triggers a default under this facility. The lender does not want to be the last to learn of trouble elsewhere. A softer version, cross-acceleration, only triggers a default here if the other lender actually accelerates its loan.
Cure Periods
Not every breach produces immediate consequences. Affirmative covenant breaches typically come with a cure period, often 30 days, to fix the problem before it ripens into a full event of default. Payment defaults generally have a shorter grace period or none. Financial covenant breaches are harder because you cannot retroactively change reported results, which is why some agreements include an equity cure right.
An equity cure lets the sponsor or owner inject fresh equity and have that capital counted toward the financial metrics as though earned during the measurement period, bringing the company back into compliance on paper. Lenders accept this because new money enters the business, but they impose strict limits. A typical agreement allows no more than two equity cures in any four consecutive quarters and three or four total over the life of the facility, with each cure capped around 15% of EBITDA.
Default Interest and Acceleration
Once a default occurs and any cure period expires, the interest rate on outstanding borrowings typically increases by 2 percentage points above the normal contract rate. This default interest accrues automatically. More significantly, the lender gains the right to accelerate: demand immediate repayment of the entire outstanding balance. Acceleration is the nuclear option and lenders do not always pull it right away, but holding the right changes the power dynamic completely. The borrower can no longer operate as though the facility will remain available on its original terms.
Forbearance
In practice, lenders and borrowers often negotiate a forbearance agreement instead of going straight to enforcement. Under a forbearance, the lender temporarily refrains from exercising its default remedies while the borrower works to cure the problem, restructure the debt, or find alternative financing. Forbearance is not free. The borrower usually pays a forbearance fee, reimburses the lender’s legal and advisory costs, and accepts tighter reporting and additional restrictions during the forbearance period. It is time bought at a steep price.
The Tax Cost You May Not See on the Term Sheet
Interest paid on a credit facility is generally deductible as a business expense, but federal law caps how much interest a business can deduct in a given year. Under Section 163(j) of the Internal Revenue Code, a business can deduct business interest only up to its business interest income plus 30% of adjusted taxable income for the year.3Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Interest above the cap carries forward to future years, but the cash cost in the current year is real whether or not the deduction is.
Smaller businesses are exempt. Companies with average annual gross receipts of $25 million or less over the prior three years (adjusted for inflation; the 2025 threshold was $31 million) are not subject to the 163(j) limitation.3Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Above that line, the limitation is worth modeling before you sign. The after-tax cost of borrowing can be materially higher than the headline rate suggests once you account for interest you pay but cannot currently deduct.