Credit Agreement Going Concern: What It Means and Why It Matters
The phrase “credit agreement going concern” may not be familiar to everyone, but it is a crucial concept in the world of business finance. In simple terms, a business is said to be a “going concern” when it is able to operate and generate revenue without any significant threat of insolvency or bankruptcy. A credit agreement going concern is an assurance given by a borrower to a lender that the borrower`s business will continue to operate as a going concern throughout the life of the loan.
Why is this important? When a lender offers credit to a business, they need to be confident that the borrower will be able to make payments on the loan over time. If the business fails or goes bankrupt, the lender may not be able to recover the full amount of the loan. Therefore, lenders often require a credit agreement going concern as part of their due diligence before offering a loan.
A credit agreement going concern typically includes a number of assurances from the borrower. These may include:
– A statement that the borrower has no plans to liquidate or wind down their business in the near future.
– A statement that the borrower has no knowledge of any upcoming events that may significantly impact their ability to continue operating as a going concern.
– A commitment from the borrower to maintain adequate levels of working capital and cash flow to meet their obligations under the loan.
– A commitment from the borrower to notify the lender if they become aware of any material changes to their business that may affect their ability to continue as a going concern.
For lenders, a credit agreement going concern helps to reduce the risk of default on a loan. It also helps to protect the lender`s interests if the borrower does experience financial difficulties down the line. If a borrower is unable to meet their obligations under a loan due to a change in their business circumstances, the lender can take action to recover the outstanding debt. However, if the borrower has provided a credit agreement going concern, the lender may have more options for recovery, which can help to minimize their losses.
For borrowers, a credit agreement going concern may be seen as a necessary evil. It can be challenging to provide these assurances, particularly if the borrower is in a volatile industry or facing uncertain economic conditions. However, having a credit agreement going concern in place can help to secure funding and provide a level of confidence for both the borrower and the lender.
In conclusion, a credit agreement going concern is a vital part of the lending process for many businesses. It provides assurance to lenders that the borrower`s business is stable and can continue operating over the life of the loan. While it may require some effort and commitment from the borrower, it can ultimately help to secure funding and protect the interests of both parties.