Legal Definitions - cleanup clause

A cleanup clause is a specific provision often included in revolving credit agreements, such as lines of credit. This clause requires a borrower to fully repay the entire outstanding balance of their loan for a designated period, known as the "cleanup" period. During this time, the borrower is typically prohibited from drawing any new funds from the credit facility. The primary purpose of a cleanup clause is to ensure that the borrower is not continuously dependent on the credit line and can demonstrate their ability to operate without it, thereby proving their financial health and liquidity.

Here are some examples illustrating how a cleanup clause might apply:

• Small Business Working Capital: Imagine a small manufacturing company, "InnovateTech," that uses a $500,000 line of credit from its bank to manage fluctuating inventory costs and payroll. Their loan agreement includes a cleanup clause stating that once every 12 months, InnovateTech must reduce its outstanding balance on the line of credit to zero for at least 30 consecutive days. During this month, they cannot draw any new funds. This ensures the bank sees that InnovateTech isn't perpetually reliant on the credit line and can generate enough cash flow to cover its expenses independently for a period.

• Corporate Credit Facility: A large publicly traded corporation, "Global Logistics Inc.," has a $50 million revolving credit facility to support its global operations and short-term financing needs. The credit agreement contains a cleanup clause mandating that the company must fully pay down the entire $50 million balance to zero for a minimum of 60 consecutive days at least once per fiscal year. This requirement demonstrates to the syndicate of banks providing the credit that Global Logistics Inc. maintains strong financial discipline and is capable of self-financing its operations without constant reliance on the credit facility, reassuring lenders about the company's long-term viability.