A Financial Contract (also known as a Binding Financial Agreement) is a written agreement or contract between two sides which sets out how the parties wish to split their financial means if the relationship ends. In other words, it is a document outlining how to finance a particular business plan or project. Generally, it takes the form of an agreement between a borrower (the financer) and a lender (the business).
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Parts of a Finance Agreement
A finance contract is essentially an agreement between the borrower and the creditor. As such, in the event of a breach, it is subject to basic contract laws relating to creation, formation, and enforcement. While each financing contract will vary depending on specific needs, there should be a basic financing agreement including:
- Names and contact details for all involved parties (may include corporate entities other than people).
- A typical statement of the existence of the undertaking or project which requires funding.
- The quantity to be lent.
- Distribution terms of the resources (if the loan will be compensated in a lump sum or with the help of monthly distributions).
- Deposit conditions for the funds.
- How to use that money?
- Determine how the parties will overcome any conflicts if there is a violation, including, for instance, an amendment requiring arbitration rather than a lawsuit.
Financial agreements can often be quite complicated, even for projects which seem straightforward. To anticipate any conflicts, they need a solid business plan, as well as foresight into the future. In certain instances, an attorney is needed for assistance with contract drafting, particularly when taking into account financing a small business. Financial contracts are not enforceable if they have been established under situations of duress or fraud, or if they require financing for an unlawful project. If a finance arrangement is infringed, the non-infringing party might also file a lawsuit for relief. Common remedies include an award for damages to compensate for the losses to the injured party. Or, the court may occasionally permit the parties to rewrite or amend the contract to adjust to any new factors in the arrangement.
Important Elements of a Finance Agreement
There are four essential elements of a financial agreement:
The purpose clause shall define the reason for which the money is to be used. It is not enough simply to say that the funding is to be used for ‘ an office building located at a location. Instead, financial firms will need to know how much is being spent on each key area. A few instances of that which can be recognized in this provision would consist of licensing payments, architect payments, cost of pieces of equipment, cost of work and so on.
The funds will only be made available as they are needed for many financing contracts. For example, financial institutions can approve a total loan amounting to $100 million but discharge it in stages. The drawdown specifications enumerate those phases and any requirements to be met to receive the resources. A small instance of this is that it requires evidence that all licensing, audits and regulatory requirements must be met before the funders discharge the funds to buy the supplies required to start the real construction.
Even though all credits have specific instructions on how and when to reimburse the funds, large construction credits will often have far more complicated information about repayment. Since the venture will not generate any revenue until it is completed, up to this point there may not be any payments required. The contract can also significantly reduce deposit quantities up to a given date and then increase them once revenue is generated.
Events of Default
While most infrastructure projects are completed without a problem, there are times when continuing construction becomes difficult. This generally leads to a financial default. The funding contract will outline how that will be addressed based on the default cause.