A five year credit agreement is a legal commitment made on behalf of a financial institution to provide a certain amount of loan to the customer for a duration of 5 years. However, it is a special type of loan where the borrower can withdraw the amount in parts in these five years.
What Is the Five Year Credit Agreement?
This is an agreement made between a customer and a financial institution that commits to providing loan to the customer for a period of five years. It is to be noted that this type of loan is secured by the inventory of the borrower. It outlines similar terms as defined in the credit agreement law.
Who Takes a Five Year Credit Agreement?
This agreement is taken by a customer and a financial institution or bank.
Purpose of a Five Year Credit Agreement
The basic purpose of the agreement is to provide a means to the borrower so that he can withdraw the money whenever he wants within a period of five years. This agreement is done in advance before the parties enter into the contract, which also helps to create financial security for both parties.
Contents of a Five Year Credit Agreement
The following are some of the contents of the agreement;
- Name and address of the parties involved borrower and Lender
- Date of commencement of agreement
- Duration of the agreement
- Details of the terms and conditions
- Details of methods of termination of agreement
- Date of renewal, if any
- Date of expiry of the agreement
- The principal amount of loan
- Details of the rate of interest
- Penalties charged if any
- Details of remedies in case of breach of agreement
- Conditions for breach of agreement
If you would like to learn how to create an accurate Five Year Credit Agreement, A credit agreement letter template that sets forth the loan terms for a letter of credit can also be referred to.
How to Draft a Five Year Credit Agreement?
The following are the process for the drafting of an agreement;
- Mention the name and address of the parties involved – borrower and Lender
- Mention the date of commencement and duration of the agreement
- Mention the details of the terms and conditions
- Mention details of methods of termination of the agreement
- Mention the date of expiry and renewal if any
- Mention the principal amount of loan, rate of interest and penalties
- Mention the conditions for breach of agreement
In this type of contract, the negotiation process is completely mutual between the parties. It is up to the lender and borrower of how they want to put the terms and conditions of the contract.
Benefits of a Five Year Credit Agreement
Benefits: It helps to provide financial security to both the Lender and the borrower. The borrower can withdraw money any time he wants during the five years term as the agreement is flexible in nature.
Drawbacks: The biggest drawback is that the borrower ends up withdrawing more than he wants.
What Happens in Case of Violation?
In case of violation of the agreement by any of the parties, whether it may be borrower or Lender, both the borrower and Lender have a legal right to file a legal complaint against each other and claim compensation for the losses suffered in case of violation.
As mentioned above, this agreement is flexible in nature and protects the financial interest of both the parties involved. Today, five year credit agreement is mostly taken up by newly established business considering its nature of flexibility of withdrawing money.
[Also Read: 364 Day Credit Agreement]
Sample for Five Year Credit Agreement
Download a Five Year Credit Agreement Sample here.