Acceleration clause: Overview, definition and example
What is an acceleration clause?
Simply put, an acceleration clause is a clause in a loan agreement that lets a lender demand full repayment of the loan immediately if certain conditions aren’t met. Think of it as the lender’s fast-forward button—it speeds up the repayment schedule if you miss payments or break other terms of the loan.
Why is an acceleration clause important?
An acceleration clause is a big deal because it sets clear rules for what happens if something goes wrong with a loan. It’s a safeguard for lenders, but for borrowers, it’s a clause you need to watch closely. If triggered, it could put your business under serious financial pressure.
Here’s why it matters: It gives lenders a way to protect their investment, ensures borrowers stick to payment schedules, and reminds everyone involved to take the agreement seriously. But for borrowers, the consequences can be severe, like sudden cash flow issues or scrambling to find funds to meet the demand.
Understanding acceleration through an example
Imagine you own a bakery and borrow money to open a second location. Your loan agreement has an acceleration clause that says if you miss two payments in a row, the lender can ask for the entire loan to be repaid immediately. Let’s say sales slump for a couple of months, and you miss those payments—the lender could enforce the clause, demanding full repayment.
This could mean dipping into your savings, selling equipment, or finding another loan to cover the debt, putting extra strain on your business when you’re already struggling.
An example of an acceleration clause
Here’s an example of what this may look like in an agreement:
“If the Borrower misses two consecutive payments or violates any other condition of this Agreement, the Lender may, at its discretion, declare the full outstanding balance, including interest and fees, immediately due. The Lender is not required to provide notice, except as mandated by law.”
Conclusion
Knowing what an acceleration clause is and how it works can help you manage your business’s financial risks. If you’re the borrower, it’s essential to be aware of the conditions that could trigger this clause and plan your cash flow accordingly. If you’re the lender, this clause offers a layer of protection against potential defaults, ensuring you have the means to recover your loan quickly if necessary.
Next time you’re going over a loan agreement, keep an eye out for any acceleration clauses. They could be the fast-forward button that changes your financial plans.
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.