Precap provisions are included in some loan agreements to permit the loan to remain in place following a change of control of the borrower. Loan agreements typically provide that a change of control of the borrower is an event of default, which allows the lender(s) to terminate the commitment(s) and declare all amounts owing by the borrower to be immediately due and payable.

Precap provisions are popular with private equity sponsors because if a portfolio company is financed by a loan that includes precap provisions the sponsor can sell the company to a new owner with its financing in place. If the borrower continues to meet all its obligations under the loan agreement after the change of control takes place, the new owner does not need to obtain replacement financing for its newly acquired company.

The term precap is also sometimes used to describe a loan that contains precap provisions.