Conditions precedent to each loan: Overview, definition, and example
What are conditions precedent to each loan?
Conditions precedent to each loan are the specific requirements a borrower must meet before a lender is obligated to release loan funds. These conditions are listed in the loan agreement and typically include documents, certifications, or other confirmations that prove the borrower is ready and eligible to receive the loan.
Why are conditions precedent to each loan important?
These conditions protect the lender by making sure the borrower has met all agreed-upon steps before receiving money. They also help the borrower stay organized and prepared, reducing the risk of delays or misunderstandings. If the conditions aren’t met, the lender can withhold the loan without being in breach of the agreement.
Understanding conditions precedent to each loan through an example
Let’s say a business has secured a $2 million loan to be disbursed in three parts. Before each disbursement, the loan agreement requires the company to provide updated financials, confirm there’s no default, and show that it used the previous loan portion properly. If the company doesn’t meet one of those requirements, the lender isn’t required to provide the next round of funds.
Example of a conditions precedent to each loan clause
Here’s how a conditions precedent to each loan clause may appear in a contract:
"The obligation of the Lender to make each Loan is subject to the satisfaction of the following conditions precedent: (a) receipt of a fully executed Loan Request; (b) no Event of Default shall have occurred and be continuing; (c) all representations and warranties shall be true and correct in all material respects; and (d) the Borrower shall have delivered all documents reasonably requested by the Lender."
Conclusion
Conditions precedent to each loan act as a checklist that must be completed before funds are released. They help lenders manage risk and ensure the borrower remains in good standing throughout the loan process. Businesses should understand and plan for these conditions to avoid delays or disruption in funding.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.