Expense Reimbursement and Indemnification in ABL Credit Agreements: Who Pays the Lender's Costs and Where the Limits Are

Every ABL credit agreement contains a section, usually near the back, headed something like Expenses; Indemnity; Damage Waiver. It rarely draws much attention at signing because the closing costs are already known and nobody expects a third-party claim. It draws a great deal of attention later, when an amendment, a default, or a workout produces a stack of legal invoices the borrower is obligated to pay, or when a dispute with a customer or regulator pulls the lender into a claim.

The section does two different jobs. The expense reimbursement clause makes the borrower pay the agent's and, in some circumstances, the lenders' out-of-pocket costs of making, administering, and enforcing the loan. The indemnification clause makes the borrower cover losses the lender group suffers from claims connected to the facility. Both are standard, and neither is going away, but the drafting decides how far they reach. This piece walks through how the section is typically built in middle-market ABL agreements and where the negotiating room sits.

Expense reimbursement: what the borrower pays

Closing and documentation costs

The borrower typically pays the agent's reasonable out-of-pocket costs of preparing, negotiating, and closing the loan documents. The largest component is the agent's legal counsel. Other items commonly include lien searches, UCC and other filing fees, title and recording costs where real estate is involved, and the costs of perfecting liens on deposit accounts and other collateral. Our ABL closing checklist covers the work these costs pay for.

Many lenders ask for an expense deposit when the commitment letter or term sheet is signed, applied against actual costs at closing. Whether the borrower owes those costs if the deal does not close is usually decided in the commitment papers, not the credit agreement, so it deserves attention before the deposit is wired.

Ongoing administration

After closing, the borrower generally reimburses the agent's costs of administering the facility. In an ABL deal, the largest recurring items are field examinations and inventory or equipment appraisals, which are usually governed by a separate covenant setting how many per year are at the borrower's expense. Our guide to affirmative covenants explains how those limits are structured. Collateral monitoring fees, where charged, are usually set in the fee letter rather than this section.

Amendments, waivers, and consents also generate reimbursable legal costs. A borrower that needs frequent changes to its agreement will pay for each one, in addition to any consent fee. See our guide to the amendment and waiver process.

Enforcement and workout costs

The broadest obligation covers the costs of enforcing or protecting the lender group's rights, including during a default, a forbearance, a restructuring, or a bankruptcy. This is where reimbursement obligations can grow quickly. Before a default, most agreements limit reimbursement to the agent's costs, often with a single primary counsel. After an event of default, the obligation frequently expands to cover each lender's counsel as well, and the costs of financial advisors, liquidation consultants, and additional field work the agent engages to evaluate its position.

Those costs are usually charged to the loan account as additional obligations, which means they can draw availability directly. In a tight liquidity situation, that is not a minor detail. Our guide to events of default covers the triggers that change the scope.

Indemnification: what the borrower covers

Who is protected

The indemnified parties typically include the agent, each lender, each issuing bank for letters of credit, and their affiliates and related parties: directors, officers, employees, agents, and advisors. The definition is broad by design, and lenders rarely narrow it meaningfully.

What is covered

The indemnity commonly covers losses, claims, damages, liabilities, and related expenses, including counsel fees, arising out of or in connection with the loan documents, the transactions they contemplate, the use of loan proceeds, any letter of credit, and, in most agreements, environmental liability connected to the borrower's properties or operations. Coverage typically extends to claims brought by third parties and, in many agreements, by the borrower itself.

Standard carve-outs

Market-standard indemnities exclude losses resulting from the indemnified party's gross negligence, bad faith, or willful misconduct, usually as determined by a court in a final and non-appealable judgment. Borrowers commonly seek, and frequently obtain, an additional carve-out for the indemnified party's material breach of its own obligations under the loan documents. Another common exclusion covers disputes solely among indemnified parties that do not arise from any act or omission of the borrower, though disputes involving the agent acting in that role are often preserved.

Taxes are usually handled in a separate tax gross-up section with its own definitions and exclusions, and most indemnity clauses expressly exclude tax matters so they are not covered twice. Increased costs and breakage are also governed by their own provisions; see our guides to yield protection and SOFR breakage.

Waiver of consequential damages

The same section usually contains a waiver under which the borrower agrees not to claim special, indirect, consequential, or punitive damages against the indemnified parties. Borrowers frequently ask for the waiver to be mutual. Lenders commonly agree in part, while preserving the borrower's indemnity obligation for consequential damages that a third party recovers against a lender. The drafting of that interaction matters more than the headline.

Timing, survival, and payment mechanics

Reimbursement and indemnity amounts are typically payable within a stated number of days after written demand, sometimes with a requirement for reasonable supporting detail. The agent is usually authorized to charge them to the loan account if they are not paid.

The obligations almost always survive repayment of the loans and termination of the commitments. That survival is the reason payoff letters sometimes ask for an indemnity reserve, cash collateral, or a release, and why lenders may want letters of credit fully cash-collateralized before lien releases are delivered. Our guide to ABL exit and payoff mechanics covers how this plays out at refinancing.

Where borrowers find negotiating room

The section is standard, but the scope is not fixed. Points borrowers commonly raise include:

• Reasonable and documented. Limit reimbursement to reasonable and documented out-of-pocket expenses, excluding internal overhead and allocated costs.
• One counsel before default. One primary counsel for the agent, plus local counsel in each relevant jurisdiction and conflict counsel only where an actual conflict exists.
• Closing budget. A cap or estimate for closing legal fees agreed at the term-sheet stage.
• Field exam and appraisal limits. Clear annual limits on borrower-paid exams outside of a default or low availability, tied to the inspection covenant.
• Material breach carve-out. An indemnity exclusion for the indemnified party's material breach of the loan documents.
• Mutual damages waiver. Mutuality on consequential damages, with the third-party exception drafted precisely.
• Invoice detail. Payment within a reasonable period after receipt of an invoice with supporting detail.

Few of these requests are unusual, and most are easier to obtain at the term-sheet stage than later. When comparing proposals from more than one lender, reading this section side by side is part of understanding the real cost of each facility; our guide to all-in ABL pricing and fees covers the broader comparison.

Where DCE fits

Don Clarke — SFNet Hall of Fame 2021, Lifetime Achievement Award recipient, author of "Asset Based Lending Disciplines" (the first ABL textbook), and trainer of more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays — has spent decades on how ABL facilities are documented and administered. DCE brings that perspective to borrowers reviewing a term sheet or credit agreement. We advise on which provisions will drive real cost over the life of the facility, help borrowers prepare for the lender process, and introduce borrowers to lenders whose structures fit the business. DCE does not lend, underwrite, fund, or approve credit, and does not provide legal advice; final credit decisions rest with the lender. Learn more about our advisory services and how the engagement works.

For lenders, DCE's sister firm ABLC (ablc.net) provides due diligence, field examination, and training services.

Educational only; not legal, tax, or investment advice. Expense and indemnity terms vary by lender, deal size, and structure. Borrowers should rely on qualified counsel for the review of any credit agreement.