The Most Important Thing to Know Before You Sign
Your greatest leverage in any credit agreement exists before you sign. Once capital is deployed, lenders have far less incentive to revisit terms, no matter how reasonable your request.
For many founders, securing a credit facility feels like crossing the finish line. In reality, it’s the starting gun for a long-term operating relationship that will shape how you run your business for years to come.
A credit agreement is not simply a funding document. It’s a framework that dictates what you can do, how you must report, and what happens when things go sideways, whether that’s a rough quarter or a period of rapid growth.
Before you sign, here are the questions that matter most.
- What Obligations Am I Accepting,Not Just What Am I Borrowing?
When a lender extends capital, the conversation naturally gravitates toward loan amount, interest rate, and repayment schedule. But the terms that most affect your day-to-day operations are often buried deeper in the agreement.
The right question isn’t: How much can I borrow?
The right question is: What am I agreeing to in exchange for this capital?
Every credit agreement carries obligations that extend well beyond repayment, understanding those obligations upfront sets founders up to thrive.
- How Do My Financial Covenants Actually Work?
Financial covenants are the performance benchmarks your lender uses to monitor risk. They typically tie to metrics like:
- Leverage ratio (total debt relative to equity)
- Liquidity (current assets vs. current liabilities)
- Debt service coverage (cash flow available to cover debt payments)
- Minimum revenue or EBITDA thresholds
Covenants exist to protect the lender. But they can also limit your flexibility, even when your business is performing well.
Key question to ask: If I miss a covenant by a small margin, what happens? Is there a cure period? Who gets notified? What remedies does the lender have?
Missing a covenant can trigger consequences that extend far beyond a warning notice, including acceleration of the full loan balance. Understand exactly how your business will be measured and what the consequences of non-compliance look like before you agree to any covenant structure.
- Is This Credit Facility Built for the BusinessI’mBuilding/ Not Just the One I Have Today?
One of the most common and costly mistakes founders make is evaluating financing based solely on current needs.
Rapid growth creates its own covenant challenges. Consider:
- Inventory investment during a product launch can compress liquidity metrics
- Acquisitions can spike leverage ratios temporarily
- New hires increase operating expenses before corresponding revenue materializes
- Working capital demands can affect borrowing base availability
The activities that drive growth can simultaneously threaten covenant compliance. This isn’t hypothetical; it’s a pattern that plays out regularly with founder-led companies.
Key question to ask: Does this facility accommodate the business I plan to be in two or three years from now, not just the business I am in today?
The strongest credit agreements include covenant structures designed to flex with growth, not punish it.
- Does My Team Have the Capacity to Meet Reporting Requirements?
A credit agreement doesn’t end at closing. It creates an ongoing reporting obligation that requires consistent internal bandwidth, including:
| Reporting Requirement | Typical Frequency |
| Financial statements | Monthly or quarterly |
| Borrowing base certificates | Monthly (for revolving facilities) and possibly with each borrowing |
| Compliance certificates | Quarterly or annually |
| Budget vs. actual updates | Monthly or quarterly |
| Lender calls or updates | As required |
Late or inaccurate reporting isn’t just an inconvenience; it can constitute a default under some agreements.
Key question to ask: Does our finance team have the systems, processes, and capacity to meet all reporting obligations under this agreement consistently?
If the honest answer is “not yet,” address that before closing, not after.
- What Actually Constitutes a Default Under This Agreement?
Many founders assume that a default happens when they miss a payment. That assumption can be dangerously incomplete.
Under most credit agreements, defaults can be triggered by:
- Covenant breaches (financial or operational)
- Late or inaccurate reporting
- Misrepresentations in any certification or compliance document
- Cross-default provisions: a default under a different financing agreement can trigger a default under this one
- Material adverse change clauses that give lenders discretion under certain circumstances
Key question to ask: Can you walk me through every event that constitutes a default and the remedies available to the lender in each case?
Understanding the full scope of what could go wrong and what your lender can do if it does is not pessimism. It’s due diligence.
- What Can I Negotiate Before Signing?
The answer: more than most founders realize.
Pre-signing is when your leverage is highest. Lenders are motivated to close. Once the funds are deployed, that dynamic shifts considerably.
Common areas to negotiate:
- Covenant cushions headroom above the minimum threshold so a single soft quarter doesn’t trigger a technical default
- Cure periods time to remediate a breach before enforcement begins
- Reporting timelines, realistic deadlines that align with your finance team’s capacity
- Acquisition and investment baskets carve-outs that permit certain growth activities without triggering a covenant event
- Additional indebtedness provisions flexibility to raise future debt or convertible notes
Key question to ask: What flexibility can we build into this agreement now, before closing?
A good lender relationship involves negotiation. If your lender isn’t willing to discuss any of these items, it tells you something important about the relationship you’re entering into.
- Will This Facility Support Future Financing and Growth?
Credit facilities don’t exist in isolation. As your business scales, you may need to:
- Raise additional equity
- Acquire another company
- Expand into new geographies
- Add a second lender or credit tranche
Many credit agreements contain provisions, negative covenants, permitted debt baskets, and change-of-control clauses that can complicate or restrict these activities without the lender’s prior consent.
Key question to ask: What does this agreement allow and prohibit when it comes to future financing, acquisitions, and structural changes to the business?
The goal isn’t to anticipate every future scenario. It’s to ensure your credit facility doesn’t become an obstacle when an opportunity arises.
Summary: What to Evaluate Before Signing Any Credit Agreement
| Question | Why It Matters |
| What obligations am I accepting? | The full cost of capital goes beyond the interest rate. |
| How do covenants work—and what if I miss one? | Breach consequences can be severe. |
| Is this built for my growth trajectory? | Rapid growth can strain compliance. |
| Can my team handle reporting requirements? | Late filings can trigger defaults. |
| What actually constitutes a default? | Payment misses are just one trigger. |
| What can I negotiate pre-signing? | Leverage disappears after closing. |
| Will this facility accommodate plans? | Restrictions can block future financing. |
The Right Financing Partner Makes a Difference
Access to capital can accelerate growth, create new opportunities, and strengthen your competitive position. But a credit agreement that isn’t properly structured or that a founder didn’t fully understand before signing can have the opposite effect.
The goal isn’t just to secure capital. It’s to secure capital that supports your long-term vision without creating operational constraints that cost you more than the financing is worth.
Before signing, take the time to understand every obligation, restriction, and risk in the agreement. The questions above are a starting point. An experienced advisor who understands both the legal and operational dimensions of business lending can help you work through the rest.
