As an individual, you’ve probably entered into all sorts of credit agreements for different purchases. For example, you may have a credit agreement that extends you money in order to purchase a car — that’s a common way to get extra money and pay for it, too. But one thing that many people don’t think about that business owners have to think about is credit agreements to keep the doors open and work running. You may need credit — essentially the promise of money as you agree to pay it back with interest — in order to get through slow times or seasonal changes in supply and demand.
As a business, when you do that, you’ll have to create a credit agreement with some institution. That has all sorts of the ins and outs that are probably familiar to you. What are those, and what should you pay attention to?
What is a Credit Agreement?
First, let’s take a recap on what is a credit agreement. A credit agreement is a legally-binding contract documenting the terms of a loan agreement that is made between a party borrowing money and a lender. Basically, it outlines all of the agreed terms regarding the loan between the parties. Credits agreements are created not only for the retail customer but also for institutional loans. As it is a legal contract, this guarantees as a failsafe to ensure repayment. Therefore, it is often required before a borrower can use the funds that are provided by the lender.
A credit agreement often includes key information such as the following:
- Name of the Borrower / Individual or Entities
- Name of the Lender / Credit Facility
- Name(s) of a Guarantors (optional in some cases)
- Date of when the credit agreement is issued
- Amount of Credit
- Interest Rate and Tax
- Repayment schedule / Manner of Repayment
- Terms of Repayment
- Security and Conditions
- In the Events of Defaulting / Termination
- Statement that ensures that the parties involved both agreed
- Printed Name and Signature
In most cases, the Credit Agreement will have more clauses that explain further the specifics of the loan. This is why it is vital to read all the clauses and understand the terms to avoid future repayment problems.
Depending on the type of credit facility, there are costs related to credit agreements. The following are what a credit provider is permitted to charge:
- Initiation Fee
- Periodic or transaction-based service fees
- Administration Charge
- Collection Costs
- Extended Warranty
- Delivery, Installation, and Initial Fueling Charges
- Connection fees/levies/charges
- Taxes, Licenses, and Registration Fees
- Premiums of Credit Insurance
With this information, the borrower will have full transparency before making a decision whether to enter or not into the credit agreement.
How do Credit Agreements work?
For retail credit agreements, there are many different ways that it can be issued, such as applying for non-revolving credit options (personal loans, credit cards, mortgage, etc.) and revolving credit options (startup loan, ventures, etc.). The credit agreement will vary depending on the facility or entity that serves as the lender. In this case, the Credit agreement is often in the form of a credit application that provides full disclosure of all the loan’s terms.
For Institutional credit, it is much more complicated than a retail agreement as it includes revolving and non-revolving credit options. In some cases, it also includes the issuance of bonds or loan syndicate when there are multiple lenders. Typically, a lead underwriter is involved to help negotiate all the terms of the credit agreement. The lead underwriter will also facilitate as a middle man if there are multiple parties involved.
The key terms include the interest rate, repayment terms, length of the credit, and any penalties for late repayments. After the negotiation and arriving at a conclusion, the parties will then must agree and sign in the document. Finally, the credit agreement is then filed and approved by the Securities and Exchange Commission or SEC.
Types of Credit Facilities: Which Credit Facility is the right one for you?
What is a credit facility? A credit facility is a type of loan made in a business or corporate finance context where financial assistance is offered by an institution to a business or company. A formal credit agreement is issued to disclose the details of the terms, presented in the form of a Letter to which the borrower can negotiate the terms included.
Below is an infographic that you can use as a reference about the different types of credit facilities.
There are various types of credit facilities, so you must first understand which is the best one that fits your needs. The facility is often tailored to different needs of a company; therefore, there are different types of credit options such as:
- Overdraft Services – when a business has no funds in its cash account, this type of credit is extended, and the repayment is with interest and fees included according to the amount borrowed.
- Retail Credit Facility – this is a type of facility often used by retailers and real estate companies. A great example of a retail credit facility is the Credit Card.
- Business Line of Credit – a company is given access to funds as needed; however, lines of credit often offer competitive rates and check-writing privileges. It is always best to check both before applying to this type of facility.
- Revolving Credit Facility – this type of credit facility is very common where a limited line of credit is offered, but it doesn’t require monthly repayment. You might think it sounds ideal; however, the principal credit accrues interest the longer it has been unpaid. Therefore, this type of credit facility is best for when you need funds asap but have the ability to repay in bulk to take advantage of the interest accrual terms.
- Term Loans / Committed Facility – this type of credit facility is often used to help finance a substantial investment or acquisition. It is a straight-forward commercial loan with a fixed term and interest rate. Basically, this is what you know as Short-term Loans (unsecured and require monthly repayment) and Long-term loans (secured by collateral).
- Letters of Credit – often used both by domestic and international trade companies. It is basically a “credit letter” guaranteeing the buyer’s payment to the sellers. This type of credit facility is often issued when the reliability of the contracting parties cannot be readily and easily determined.
What is not a Credit Agreement and Unlawful Credit Agreements?
According to the National Credit Act, the following are not considered credit agreements:
- Insurance policy or credit extended by an insurer for the repayment of premiums
- Lease of immovable properties
- Transaction between a stokvel and a member of that stokvel
It is also important to take note of the following unlawful credit agreements:
- If the borrower is not of legal age with no guardian consent
- If the borrower is not mentally fit by Order of Court
- If the borrower is under a contract and conducting a credit without consent
- If the credit is from negative option marketing
- In case of split documentation providing separate “agreement”
- If the credit provider is un-registered
Basically, a credit agreement is deemed unlawful if it attempts to deceive the parties involved, such as the borrower, facility, and also defeating the policy and purposes of the credit act.
If the court deems a credit agreement as unlawful, the borrower is not required to pay back the amount owed and, in some cases, require the lender to return all payments received from the borrower. Therefore, it is important to be informed of your rights as a borrower to avoid fraudulent issues of credit agreements.
The following are the consumer rights in the credit marketplace:
- Protection against discrimination
- Right to be given reasons for being refused or discontinue credit
- Right to information relating to the agreement in one’s language
- Protection of confidential information
- Right to choose whether to receive documents electronically or in paper copy
Especially for business credits, it is always best to add extra protection by asking for credit insurance to guarantee the credit agreement. This is usually offered by the credit provider, paid in premiums in addition to the credit that is payable periodically.
We hope that this article is helpful to your needs. To read more about Credit Agreements and types of Credit facilities, feel free to read more here: What is a Credit Agreement.
Feel free to check out our selection of financial model templates to help you with creating a repayment schedule for revolving credits or non-revolving credits here:
This Financial Model Template in Excel assists you to determine the financial feasibility for your next Tourism Project. The model comes up with monthly and yearly financial forecasts based on the estimated number of visitors and revenue models relat... read more
The Hotel Investment Financial Model provides a framework to forecast the expected cash flows for a hotel investment and calculates the relevant investor metrics such as the IRR (levered and unlevered).
Advanced Financial Model providing a dynamic up to 10-year financial forecast for a Software as a Service (SaaS) startup business.
Financial model template for a high-level real estate brokerage firm that facilitates the buying and selling of real estate properties between buyers and sellers. Providing a sound financial plan and 5-yrs worth of financial projections while applyin... read more
This template is a detailed financial model that takes into account the specifics of the real-estate niche that is the hotel industry.
This Project Plan Template in Google Sheet allows you to quickly develop a project plan and plot a Gantt chart. Enjoy all the benefits of Google Docs by sharing this document with your team and update simultaneously.
The Poultry Farm Valuation Model allows forecasting the financial statements for a poultry farm based on operational metrics such as the hatchery ratio, mortality rate etc. The financial model calculates the resulting DCF value of the farm.
This valuation model in Excel assists fish farmers and investors to value a fish farm based on the Discounted Cash Flow (DCF) Method. The model is fully comprehensive, including a fish nursery, hatchery and fish farm.
Start Up Food Truck Business Financial Model presents the case of an investment in a food truck business and its operation. The model generates the three financial statements, a summary page, a market snapshot, and a valuation, along with various fea... read more
The Gas Station Financial Feasibility Model Template provides you with a framework to determine the financial feasibility of your next gas station project and come up with an appropriate financing structure. The model calculates the required funding ... read more
This coffee farm financial feasibility model template prepares a financial plan for your next coffee growing project! Figure out the expected incomes and cash flows for a small or a large coffee plantation project. The model uses a bottom-up approach... read more
The Rice Farming Financial Model enables rice farmers and investor to evaluate an investment into a rice farming operation via Discounted Free Cash Flow (DCF) and Internal Rate of Return (IRR) analysis from an investment point of view.
User-friendly Excel model for the preparation of a 26-week rolling cash flow forecast for a generic new or existing business. The model allows the user to input cash flow assumptions for up to 3 revenue streams, 3 variable cost categories for each re... read more
3 statement 5 year rolling financial projection Excel model for a startup /existing business engaged in construction or engineering projects
This Waterfall Model Template in Excel provides a calculation model for a four tier Private Equity Waterfall profit distribution scheme.
Development & Construction Model presents the case where a property with multiple residential units is constructed and subsequently rented for several years before the property is sold. The model generates cash flows and a project and equity basi... read more
This template enables users to compile comprehensive monthly management accounts based on any chart of account structure. The management accounts are compiled by linking each account to different levels of reporting groups.
The financial model presents the business case of a SaaS online business. Software as a service (SAAS) is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted. SAAS applications are als... read more
This financial model can be used to evaluate the financial feasibility of a real estate development project and present it to investors and financial institutions. It is simple and intuitive to make calculations.
The Purpose of the 4 Step Budget Analysis Spreadsheet Template is to offer a user-friendly solution to track your budget on a monthly basis. The budget template in Excel offers input pages for monthly Budget and Actual Profit & Loss figures for t... read more
The Hotel Valuation Financial Model provides a simple way to forecast the expected cash flows for a hotel investment and calculates the relevant investor metrics such as the IRR (levered and unlevered).
The Gold Mine Investment Model is used to determine the financial feasibility of a proposed Gold Mine Investment. The Financial Model outputs IRR and NPV based on the Mine Life expectation.
The DCF Valuation Model for Restaurants provides a business plan in the form of an Excel Template to value a restaurant based on the Discounted Cash Flow Method.
The three statement model provides a simple template in Excel to forecast the three financial statements over the next 5 years: Income Statement, Balance Sheet, Cash Flow Statement
The Model Incorporates data provided by different available sources to Model an Electrolysis financial model. It includes Electrolyzer cost, Dispenser, Storage Compression & Transport Cost. The Model has a ticker to include the cost of the transp... read more
A self-made Modeling Test with a solution for Onshore Wind Turbines plant. The case study is in Chile assuming a 376 MW Capacity. The download includes a PowerPoint Presentation, a PDF, along with an excel model with explanations.
A stacking plan is a two-dimensional chart displaying the arrangement of tenants on every floor of a multi-tenant office building.
Abacus is a bankable, easy-to-use, debt-sculpting financial model for use in renewable (solar, wind, etc.) energy as well as PPP transactions.
Start Up Solar Farm Excel Model presents the business case of an investment in the construction of a solar farm and the sale of the energy generated from it. The model generates the three financial statements as well as the cash flows and calculates ... read more
The Pharma Biotech Valuation Model Template calculates the risk-adjusted DCF Value of a Pharma or Biotech Company with several products under development. The product forecasts are probability adjusted to take into account the success probabilities a... read more
Financial model for a typical project finance solar project.
Analyse different operating Models for Real Estate offices, agencies and franchisees. Now more than ever before it has become important to analyse and compare different type Models such as work from home, share desk, traditional commission share, sub... read more
The template is an effective measure of investment risk by highlighting the number of years necessary to recover the initial investment
This simple DCF model in Excel allows you to value a company via the Discounted Free Cash Flow (DCF) valuation method. The discounted cash flow valuation model uses a three statement model to derive free cash flows to firm and discounts them to their... read more
Feel free to download this simple Dividend Discount Model Template in Excel. There are two kinds of simple calculators for dividend discount included, the Gordon Growth Model (GGM) and 5-year Multi-Stage Dividend discount model (DDM).
3 statement 5 year rolling financial projection Excel model for a startup or existing business selling subscription content services or products