A finance agreement is a document that outlines how a particular business plan or project is to be financed. It usually takes the form of a contract between a lender (the financer) and a borrower (the business).
Many businesses don’t have the funds right away to implement a project they have been planning. Thus, a finance agreement or financing agreement may be necessary to ensure that the project is properly funded without any obstacles along the way.
Finance agreements can cover many, many different types of business activities. In fact, any project requiring outside funding will generally need a finance agreement. Most finance arrangements allow the borrower to repay their debt using the profits generated from the project. For example, a lender may issue a bond to a company for the construction of a movie theater. The company can then use proceeds from ticket sales to repay the money that they borrowed.
In some cases, a company may set up an entirely different corporation or sub-entity for the specific project. This helps to shield the larger entity from liability if something goes wrong with that specific project.
A finance agreement is basically a contract between the creditor and the borrower. As such, it is subject to basic contract laws regarding creation, formation, and enforcement in the instance of a breach.
While each finance agreement will be different depending on individual need, a basic finance agreement should include:
- Names and contact information for all the parties involved (may include business entities in addition to individuals)
- A general statement of the nature of the business or project that needs funding
- The amount to be borrowed
- Terms of distribution of the funds (whether the loan will be paid in lump sum or through monthly distributions)
- Terms of repayment for the funds
- How the money is to be used
- How the parties will resolve any disputes if a breach should arise- for example, including a clause requiring arbitration instead of a lawsuit
Financing agreements can often be quite complex, even for seemingly straight-forward projects. They require a solid business plan as well as foresight into the future to anticipate any conflicts. In most cases a lawyer is required for help with drafting the contract, especially when considering financing a small business.
Finance agreements are not enforceable if they were created under circumstances of duress or fraud, or if they involve financing for an illegal project. If a finance agreement is breached, the non-breaching party may often file a lawsuit to obtain relief. Common remedies include a damages award to compensate for the injured party’s losses. Or, the court can sometimes allow the parties to rewrite or amend the contract in order to adjust to any new factors in the arrangement.
Financing a business or a business project can be a major endeavor. It will typically require the expertise of a lawyer, who can help you with the negotiation, drafting, and reviewing stages. A qualified business lawyer in your area can also represent you in court if you need to file a lawsuit involving a finance agreement.