A Credit Support and Pledge Agreement is a legal agreement that is created when two different parties or stakeholders are entering into a credit support transaction. In this type of transaction, one party provides a certain amount of credit to the other in exchange for a security or collateral in the form of a work in progress, raw materials, real estate, or stake in the business which belongs to the borrower. This type of agreement is most usually created between a financial institution like a bank and a borrower, who might either be an individual or a small business owner.
The unique aspect of this agreement lies in the fact that the credit amount assigned by the lender is pre assigned a base value and there lies flexibility so that the borrower can either increase or decrease the amount of credit he is borrowing.
When Do You Need A Credit Support And Pledge Agreement?
The most common application of this legal agreement can be found when a financial institution such as a bank is lending a certain amount of credit to either a private or public individual, or to a small business owner. In exchange, the financial institution will demand for a form of security which can either be raw materials, proof of work in progress, real estate or anything else which falls under the eligibility criteria.
This legal document contains details of the amount of credit that is being extended to the borrower and also Information on the security that is being issued.
Inclusions in Credit Support And Pledge Agreement
Parties Involved: In this legal document, there are usually two parties involved. The first party is the lender who is known as The Company, and the second party is the borrower, who is known as the Lender in the context of the legal agreement.
Effective Dates: In this section of the legal agreement, the details of the important dates of the contract are mentioned. Dates such as when the credit will be issued, by when does the credit need to be reimbursed and when the transaction closes are pre-decided and agreed upon before the creation of this contract.
Where does it Apply: This agreement is legally binding, within the boundaries of the state and or the city it has been issued at.
How to draft a Credit Support and Pledge Agreement?
If you are a private individual or a small business owner, follow the underlying steps to draft a Credit Support and Pledge Agreement for your use.
Reach out to a bank and arrange a meeting, wherein you have to discuss the amount of credit you would like to borrow. Discuss upon the terms and conditions that will be set by the lender and see to it that both your mutual interests are fulfilled.
Once the terms and conditions have been mutually agreed upon, reach out to a lawyer and ask them to draft a Credit Support and Pledge Agreement for you.
Reach out to the bank and get the authorized signatories in place after all the details mentioned in the contract have been duly verified, and due diligence from the lender has been successfully completed.
Benefits of Credit Support and Pledge Agreement
The benefits of having a Credit Support and Pledge Agreement are far and wide. Mentioned below are the most significant ones.
Pros of having a Credit Support and Pledge Agreement
This agreement serves as a legal documented proof of a transaction taking place between the borrower and the lender and thus can be produced in court if there be a need in the future.
This document being legally binding will protect both the stakeholders from any possible chances of fraud.
Cons of not having a Credit Support and Pledge Agreement
In the absence of this agreement, either of the parties doesn’t have legal proof of a transaction taking place and thus are at risk of fraud, the default in payment or lapse in terms. In such a situation where there is an absence of a legal contract, both parties stand to lose.
Key terms & Clauses of a Credit Support and Pledge Agreement
Notices: In the event of this contract coming into effect several notices need to be served to both the parties and stakeholders involved, and this section of the document outlines the details of the same.
Remedies: In the case of a lapse in terms and conditions, or a default in payment by either of the parties, the details of the remedies to be borne are mentioned in this section of the Credit Support and Pledge Agreement.
Obligations: Both the parties before and after entering into this contract have certain legal obligations to each other, whose details are mentioned under the obligations section of the contract.
Disclaimers: Certain disclaimers need to be discussed and mutually agreed upon before this legal document and these details under this section of the contract.
[Also Read: Pledge Agreement]
Sample Draft of Credit Support And Pledge Agreement
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