Financing Arrangements

What are Financing Arrangements?

Financing arrangements refer to the funding agreements between your company and third parties, defining the terms and conditions of the funds borrowed by your company.

Financing arrangements refer to the documentary evidence related to the funding received by your company from third parties to run or expand your operations. These include funding agreements with different financial institutions such as banks and institutional investors and exclude any agreements for equity funding.

These include financial documents on:

• Loans: Contain details of the amount, type and tenure of loans borrowed by your company and various charges such as documentation, stamp duty and interest associated with it
• Lines of Credit: Contain details of the pre-determined amount of loan that your company can borrow in multiple installments (similar to a credit card), along with information on interest charges and tenure
• Mortgages: Contain details of the debt that your company can borrow by leveraging collateral (such as real estate), applicable interest rates and repayment terms and tenure
• Security Deposits: Contain details of your company’s deposits with a third party, either as an initial payment to purchase an asset in the future or as an advance deposit for rent of an asset

Why are Financing Arrangements important for business today?

Financing arrangements documents enable your company to:

• Gain visibility into the amount, interest rate and duration of various debt instruments
• Determine the frequency and amount of installments for the upcoming month, quarter and year
• Assess the requirements and performance targets outlined under various arrangements and evaluate your compliance with them
• Evaluate various business risks associated with the amount borrowed from third parties under different agreements
• Evaluate various lines of credit options available to your company to raise funds
• Assess the collaterals provided by your company to borrow money and manage them efficiently

Why is it important for an event tomorrow?

Financing arrangements documents are important for an event tomorrow, as they help:

• Determine the total money borrowed and the arrangements used by your company
• Assess the legal obligations of your company related to financing arrangements such as interest payable, maturity date and repayment schedule
• Evaluate the repayment capability of your company and determine its ability to raise additional debt
• Determine the details of covenants applicable to your company and your compliance with them
• Assess your company’s ability to deal appropriately with various financiers or lenders
• Analyze your company’s credit rating or score

Pros of addressing Financing Arrangements

• Reduction in risk of litigations by documenting all transactions; including amount borrowed, amount repaid and interest charges
• Compliance with the terms and condition and covenants of various arrangements
• Financial decision-making by assessing the amount outstanding, loan tenure and interest rate
• Formulation and implementation of rigorous internal processes to manage loans and relationship with lenders more effectively
• Transparency and better coordination with third parties
• Better financing opportunities for future initiatives and projects

Cons of not addressing this topic

• Operational inefficiencies due to inability to track the total loan amount, interest rates and frequency of installments
• Limited ability to identify cash flow requirements
• Increased time required for, and cost of, due diligence for both internal company management and potential investors