As a first-year associate in a debt finance practice, one of the first major documents I encountered was the credit agreement. While dense and highly technical at first glance, this document is central to any lending relationship and worth understanding, even for lawyers outside of the finance world. It governs the legal and financial relationship between a borrower and its lender and sets the tone for the entire financing deal.

At its core, a credit agreement is a contract between a borrower and a lender (or group of lenders) that outlines the terms and conditions by which the borrower can access funds. It is typically drafted by lender’s counsel and negotiated with borrower’s counsel, and governs the rights, responsibilities and obligations of all parties involved. A credit agreement can range from 50 to over 150 pages and often includes schedules, exhibits and ancillary documents like security agreements and guarantees. Despite the complexity, most credit agreements follow a relatively standard structure, including definitions, loan terms, conditions precedent, representations and warranties, covenants, events of default, remedies and miscellaneous provisions.

One of the first things I learned about the credit agreement was just how powerful the definitions section is. Practically every material business or legal term is defined here, and those definitions can greatly change how the agreement operates. Take EBITDA for example – what may seem like a straightforward accounting concept could be negotiated to include various add-backs and exclusions that affect how the financial covenants are calculated, and, in turn, whether a borrower is in default. Further, concepts like “Permitted Liens” and “Change of Control” should be carefully tailored to the borrower’s structure and business practices to avoid default later down the line.

Another key component of the credit agreement is the covenants. Covenants are one of the most negotiated parts of a credit agreement. They list what the borrower must do (affirmative), must not do (negative) or must maintain (financial) throughout the life of the loan. Affirmative covenants typically include requirements to deliver financial statements, maintain insurance, comply with various laws and maintain corporate existence. Conversely, negative covenants can restrict the borrower from incurring additional debt, granting additional liens on the pledged collateral (excluding Permitted Liens), or transferring assets, among other things. Finally, financial covenants are key performance benchmarks that the borrower must meet on an ongoing basis. They can include concepts like minimum liquidity, coverage ratios and leverage ratios, and are commonly tested on a monthly, quarterly or annual basis. Ultimately, the covenants are there to give the lender control or visibility into the borrower’s financial health and risk. Flexibility can be negotiated through baskets, thresholds or exceptions. For junior associates, understanding how these covenants interact, especially with the defined terms and financial schedules, is an important early skill.

Further, every credit agreement includes a section detailing what happens when the borrower is in breach of the agreement — called “Events of Default.” Default may be triggered by things like failure to pay principal or interest, breach of a covenant, misrepresentation, insolvency or other bankruptcy events, cross-defaults of other key agreements, or change of control. The credit agreement provides for various lender remedies, allowing the lender to accelerate payments, charge default interest or exercise its rights under the collateral documents in the event of a default. Cure periods, notice requirements and materiality qualifiers are critical to this section — borrowers want time and flexibility, whereas lenders want clarity and speed.

Credit agreements appear across the business law landscape — in M&A deals, real estate closings, restructurings and even in-house legal departments assessing a company’s financial health. For junior associates, developing a working familiarity with these documents early on is a valuable differentiator. It enables you to spot issues that may impact your client’s broader strategy, understand how lender rights can influence corporate actions and collaborate more effectively with finance counsel. While credit agreements can be dense and highly technical, they are also logical and structured, making them excellent training grounds for junior lawyers. You don’t need to master every provision at once, but by focusing on the big picture and staying curious about the details, you’ll build fluency over time. With each deal, you’ll become more comfortable with the language, better at identifying negotiation leverage and increasingly confident in your ability to add value to both your team and your clients.

Adriana Snedaker is an associate in the Bass, Berry & Sims PLC debt finance practice, representing borrowers and lenders in financing transactions, including acquisition and construction loans, term loan facilities, asset-based secured financings and revolving credit facilities. Snedaker also collaborates with the firm’s Corporate & Securities Practice Group on corporate transactions, such as mergers and acquisitions, for public and private companies, which involve financing issues.