A loan agreement is a contract between a borrower and a lender which regulates the mutual promises made by each party. There are many types of loan agreements, including «facilities agreements,» «revolvers,» «term loans,» «working capital loans.» Loan agreements are documented via a compilation of the various mutual promises made by the involved parties.
Prior to entering into a loan agreement, the «borrower» first makes representations about his affairs surrounding his character, creditworthiness, cashflow, and any collateral that he may have available to pledge as security for a loan. These representations are taken into consideration and the lender then determines under what conditions (terms), if any, they are prepared to advance money.
Loan agreements, like any contract, reflect an «offer,» the «acceptance of the offer,» «consideration,» and can only involve situations that are «legal» (a term loan agreement involving heroin drug sales is not «legal»). Loan agreements are documented via their commitment letters, agreements that reflect the understandings reached between the involved parties, a promissory note, and a collateral agreement (such as a mortgage or a personal guarantee). Loan agreements offered by regulated banks are different from those that are offered by finance companies in that banks receive a «banking charter» granted as a privilege and involving the «public trust.»