Lender elections to increase: Overview, definition, and example
What are lender elections to increase?
Lender elections to increase refer to a provision in a loan or credit agreement that allows a lender, under certain conditions, to increase the amount of the loan or credit facility provided to the borrower. This provision gives the lender the flexibility to offer additional funds if needed, typically within a predefined limit or timeframe, and often based on specific circumstances such as business growth, new investments, or an improved financial situation of the borrower.
In simpler terms, a lender election to increase is when a lender has the option, but not the obligation, to increase the amount of money they are lending to the borrower, usually subject to certain conditions or approval processes.
Why are lender elections to increase important?
Lender elections to increase are important because they provide flexibility for both the borrower and the lender. For the borrower, this provision allows them to access additional funds if their financial needs grow or if they have the opportunity to expand their business. For the lender, it offers an opportunity to provide more capital while maintaining control over the process.
This provision can help businesses grow or manage unexpected financial needs, such as expansion projects, acquisitions, or managing cash flow during economic fluctuations. It also helps prevent the borrower from seeking additional funding from other sources, which could involve higher interest rates or more complex terms.
Understanding lender elections to increase through an example
Imagine a company that enters into a loan agreement with a bank for a line of credit of $500,000. The agreement includes a lender election to increase, which means that if the company needs more funds in the future, the bank has the option to increase the credit line up to an additional $250,000 without renegotiating the entire loan agreement. This option provides the company with flexibility and financial security as they can request the increase if they need it, and the bank can approve it if certain conditions, such as a positive credit assessment, are met.
In another example, a startup company has a loan agreement with a venture capital firm to fund product development. The agreement includes a lender election to increase, allowing the firm to provide more capital if the startup meets certain milestones, such as achieving a certain level of revenue or securing additional partnerships.
Example of a lender election to increase clause
Here’s how a lender election to increase clause might appear in a loan agreement:
"The Lender shall have the option, but not the obligation, to increase the Loan Amount by up to [X]% of the original loan amount, provided that the Borrower meets the conditions outlined in Section [X] and the Lender is satisfied with the Borrower’s financial position. Any such increase shall be subject to the Borrower’s request and approval by the Lender, and the terms of this Agreement shall apply to any increased amounts."
Conclusion
Lender elections to increase offer both flexibility and security for borrowers and lenders alike. For borrowers, it provides a way to access additional funds when needed, while for lenders, it ensures that any increase is carefully evaluated and aligned with the borrower’s financial situation.
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.