Acceleration termination of facilities: Overview, definition, and example
What is acceleration termination of facilities?
Acceleration termination of facilities refers to a provision in financial agreements, such as loan or credit agreements, that allows a lender to demand the immediate repayment of all outstanding debt if certain conditions are met. These conditions might include events of default, such as failure to make payments, violation of covenants, or insolvency. The "acceleration" refers to the lender's right to accelerate the maturity of the debt, meaning that the entire amount becomes due and payable immediately, rather than over time. The "termination of facilities" means that the borrower's access to further credit or funding from the lender is terminated as part of the acceleration process.
For example, if a borrower fails to make timely interest payments on a loan, the lender may invoke the acceleration clause, requiring the borrower to repay the full outstanding balance immediately.
Why is acceleration termination of facilities important?
Acceleration termination of facilities is important because it provides the lender with a mechanism to protect their interests in case the borrower defaults on their obligations. It acts as a safeguard for lenders, allowing them to recover the loan balance quickly if the borrower is unable to meet the terms of the agreement. For borrowers, this provision emphasizes the importance of adhering to the terms of the loan agreement, as failure to do so can result in the loss of access to credit and immediate financial obligations.
For businesses, the acceleration termination clause can act as a deterrent against default, encouraging them to maintain good standing with their lenders. For lenders, it ensures that they have the right to take swift action if the financial situation of the borrower deteriorates.
Understanding acceleration termination of facilities through an example
Imagine a company that has a revolving line of credit with a bank. The agreement includes an acceleration termination clause, stipulating that if the company defaults on a loan payment or breaches a covenant (such as failing to maintain a certain debt-to-equity ratio), the bank can accelerate the loan. This means that the bank can demand immediate repayment of the entire outstanding balance of the loan, and the company would lose its access to any further credit under the line of credit.
In another example, a business takes out a loan with specific payment terms and a clause that allows for acceleration termination of facilities if the business becomes insolvent. If the company faces financial difficulties and declares bankruptcy, the lender can invoke the acceleration clause, calling the entire loan balance due immediately and terminating any access to additional funding.
An example of an acceleration termination of facilities clause
Here’s how a clause like this might appear in a loan or credit agreement:
“Upon the occurrence of an event of default, including but not limited to failure to make any required payment or breach of any covenant, the Lender may, at its discretion, accelerate the full amount of the outstanding loan and terminate all credit facilities. The entire outstanding balance shall become immediately due and payable, and the Borrower shall have no further access to any facilities under this Agreement.”
Conclusion
Acceleration termination of facilities is a critical provision in loan and credit agreements that allows lenders to take swift action in the event of default, ensuring they can recover the outstanding debt promptly. This clause serves to protect lenders and incentivizes borrowers to comply with the terms of the agreement. For borrowers, understanding this provision is essential to avoid the risk of sudden financial strain, including the immediate repayment of the loan and the loss of future access to credit.
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.