Indebtedness clause: Copy, customize, and use instantly
Introduction
An indebtedness clause outlines the responsibilities of the parties regarding any debts or financial liabilities they may have during the term of the agreement. This clause typically specifies how outstanding debts will be managed, what constitutes prohibited indebtedness, and the consequences of failing to meet these responsibilities. It is crucial for protecting the financial interests of the parties and ensuring that liabilities are disclosed and addressed.
Below are templates for indebtedness clauses tailored to different scenarios. Copy, customize, and insert them into your agreement.
Borrower-friendly variation
This variation allows the borrower greater flexibility in incurring debt, with fewer restrictions and broader exceptions.
The borrower may incur additional indebtedness without prior consent, provided that such indebtedness does not exceed [specific amount or percentage] of the borrower's net assets and complies with all applicable covenants under this agreement.
Lender-friendly variation
This variation imposes strict limitations on the borrower's ability to incur additional debt, ensuring the lender’s interests are prioritized.
The borrower shall not incur any additional indebtedness without the prior written consent of the lender, except for indebtedness incurred in the ordinary course of business, not exceeding [specific amount or percentage].
Balanced/neutral variation
This variation strikes a balance between borrower flexibility and lender protections, often used in collaborative agreements.
The borrower may incur additional indebtedness up to [specific threshold], provided that such indebtedness is disclosed to the lender in writing within [specified timeframe] and does not violate the financial covenants outlined in this agreement.
Industry-specific variation
This variation addresses unique considerations in specific industries, such as technology startups or manufacturing.
The borrower may incur indebtedness related to [specific industry-related purpose, e.g., equipment leasing or R&D], provided that such indebtedness is expressly for operational purposes and does not exceed [specific amount or percentage of net revenue].
Borrower-friendly variation
This version provides flexibility for borrowers to incur debt, with manageable limitations.
The borrower may incur indebtedness not exceeding [specific amount or percentage], provided that the indebtedness is used for operational growth and disclosed to the lender within [specified timeframe].
Lender-friendly variation
Designed to protect the lender, this variation restricts borrowing without explicit consent.
The borrower shall not incur indebtedness beyond existing liabilities, except with prior written approval from the lender and in accordance with the terms outlined in this agreement.
Balanced/neutral variation
This version balances borrower needs and lender protections with clear thresholds.
The borrower may incur additional indebtedness up to [specific threshold] if it is used for purposes specified in the agreement and remains within the parameters of the financial covenants.
Industry-specific variation
Tailored for unique needs, this variation considers industry-specific borrowing practices.
The borrower may incur indebtedness for [specific purpose, e.g., infrastructure upgrades or technology investments], provided it aligns with industry best practices and does not exceed [specified amount or percentage].
Exception for government grants
The borrower may incur indebtedness in the form of government-backed loans or grants, provided such financing does not require collateralization of the borrower's core assets and is reported to the lender within [specific timeframe].
Permitted refinancing of existing debt
The borrower may refinance existing indebtedness with terms equal to or more favorable than the original agreement, provided the principal amount does not increase by more than [specific percentage].
Threshold-based debt acceleration
The borrower may incur short-term indebtedness for operational emergencies, provided such indebtedness does not exceed [specific amount] and is repaid within [specific timeframe], subject to lender notification.
Joint venture financing exception
The borrower may incur indebtedness through joint ventures, provided that the liabilities are non-recourse to the borrower’s assets and limited to the joint venture’s obligations.
Acquisition-specific debt allowance
This variation allows borrowers to take on debt for strategic acquisitions under defined conditions.
The borrower may incur indebtedness exclusively for funding mergers or acquisitions, provided that such debt is repaid or restructured within [specific period] and aligns with agreed financial ratios.
Intercompany loan exemption
This variation permits debt between related entities while safeguarding the lender's position.
The borrower may incur indebtedness in the form of intercompany loans from subsidiaries or parent entities, provided such loans are subordinate to this agreement and do not exceed [specific percentage] of total assets.
Convertible debt allowance
This variation enables borrowing through convertible instruments under specified terms.
The borrower may issue convertible debt instruments, provided the conversion rights do not dilute the lender's secured interests and the total principal does not exceed [specific cap].
Crisis-related borrowing
This variation addresses debt incurred during emergencies with strict limitations.
The borrower may incur indebtedness in response to unforeseen emergencies or natural disasters, provided such debt is pre-approved by the lender or does not exceed [specific percentage] of annual gross revenues.
Revenue-backed debt exception
This variation ties borrowing limits to specific revenue streams for added flexibility.
The borrower may incur revenue-backed debt, provided the repayment structure is tied exclusively to receivables from specified contracts or projects.
Securitization exception
This variation allows the borrower to securitize certain assets for debt issuance.
The borrower may incur indebtedness by securitizing non-core assets, provided the securitized obligations are fully isolated from the borrower's operating liabilities.
Cross-border borrowing
This variation facilitates foreign debt while mitigating risks for the lender.
The borrower may incur indebtedness from foreign lenders, provided such borrowing complies with local regulations and does not expose the lender to foreign exchange risks exceeding [specific threshold].
Equipment lease exception
This variation permits specific lease arrangements as a form of debt.
The borrower may enter into capital lease arrangements for equipment acquisition, provided such arrangements are disclosed in advance and do not result in additional security interests on core assets.
Operational line of credit
This variation supports short-term operational borrowing under defined caps.
The borrower may maintain a revolving line of credit for operational expenses, provided that withdrawals are limited to [specific amount] per fiscal quarter and repaid within [specific period].
Vendor financing flexibility
This variation accommodates vendor financing tied to long-term agreements.
The borrower may incur vendor financing directly tied to long-term supply agreements, provided repayment terms do not conflict with this agreement or impair the lender's position.
Contingent liability allowance
This variation permits limited liabilities arising from specific legal obligations.
The borrower may assume contingent liabilities arising solely from litigation settlements, provided the liabilities are capped at [specific amount] and paid in structured installments.
Debt assumption during restructuring
This variation allows borrowers to assume debt during company restructuring with specific safeguards.
The borrower may assume existing indebtedness from acquired entities as part of a restructuring process, provided that such debt is disclosed to the lender and does not exceed [specific percentage] of the borrower’s consolidated assets.
Green financing exception
This variation enables borrowing for environmentally sustainable projects under defined limits.
The borrower may incur indebtedness to fund environmentally sustainable projects, provided the total amount does not exceed [specific amount] and complies with all environmental impact covenants in this agreement.
Deferred payment arrangement
This variation permits debt in the form of deferred payment obligations for large transactions.
The borrower may incur indebtedness in the form of deferred payments for capital acquisitions, provided the repayment schedule does not extend beyond [specific period] and is disclosed to the lender.
Subordinated debt for employee stock ownership plans (ESOPs)
This variation allows borrowing specifically for funding ESOPs under strict conditions.
The borrower may incur subordinated indebtedness to finance an employee stock ownership plan, provided such debt is limited to [specific percentage] of annual earnings and is repaid within [specific timeframe].
Cap-and-monitor debt clause
This variation sets a cap for borrowing with monitoring requirements.
The borrower may incur indebtedness up to [specific cap], subject to quarterly financial reporting to the lender and compliance with all relevant covenants.
Bridge financing allowance
This variation facilitates short-term borrowing for liquidity gaps with strict repayment conditions.
The borrower may incur bridge financing up to [specific amount] for temporary liquidity needs, provided that the loan is repaid within [specific period] and does not exceed [specific percentage] of gross revenues.
Shared debt responsibility
This variation permits joint indebtedness with other parties under defined parameters.
The borrower may incur joint indebtedness with affiliated entities, provided the borrower’s share does not exceed [specific percentage] of the total debt obligation and remains non-recourse to core assets.
Peer-to-peer lending exception
This variation enables borrowing through peer-to-peer platforms with clear limits.
The borrower may incur indebtedness through peer-to-peer lending platforms, provided the total amount does not exceed [specific threshold] and the repayment terms align with the covenants of this agreement.
Unsecured debt for research and development
This variation permits unsecured debt specifically for R&D projects.
The borrower may incur unsecured indebtedness exclusively for research and development purposes, provided such debt does not exceed [specific percentage] of total annual expenses and is reported to the lender.
Seasonal working capital flexibility
This variation supports seasonal borrowing to address operational needs.
The borrower may incur indebtedness for seasonal working capital requirements, provided such debt is fully repaid within [specific timeframe] and does not exceed [specific percentage] of average monthly revenues.
Community development financing
This variation allows borrowing for community-focused initiatives.
The borrower may incur indebtedness to fund community development projects, provided the total does not exceed [specific amount] and aligns with any applicable local laws or regulations.
Mezzanine financing exception
This variation permits subordinated debt for high-risk financing under specific limits.
The borrower may incur mezzanine financing, provided the total indebtedness remains subordinate to senior obligations and does not exceed [specific percentage] of total equity.
Innovation grant matching clause
This variation allows matching debt obligations tied to innovation grants.
The borrower may incur indebtedness to match funding requirements under awarded innovation grants, provided the borrowing is limited to [specific amount] and aligns with the scope of the grant.
Overdraft facility allowance
This variation permits limited use of overdraft facilities for liquidity management.
The borrower may utilize an overdraft facility up to [specific amount], provided it is cleared within [specific number of days] and does not result in additional security being pledged.
Debt for intellectual property acquisition
This variation supports borrowing for acquiring or licensing intellectual property.
The borrower may incur indebtedness for the acquisition or licensing of intellectual property, provided the repayment terms do not exceed [specific period] and the debt remains unsecured.
Debt for tax liabilities
This variation permits borrowing to manage tax-related obligations.
The borrower may incur indebtedness to settle outstanding tax liabilities, provided such debt does not exceed [specific percentage] of annual net revenue and is fully disclosed to the lender.
Debt-for-equity swap flexibility
This variation allows limited borrowing convertible to equity under specified terms.
The borrower may issue debt instruments convertible into equity, provided that such instruments are subordinated to existing liabilities and conversion is limited to [specific percentage] of equity.
Supplier credit arrangement
This variation permits debt in the form of supplier credit under capped conditions.
The borrower may incur indebtedness in the form of supplier credit for essential goods or services, provided the repayment terms do not exceed [specific period] and the total credit remains below [specific cap].
Asset-backed microfinancing
This variation permits small-scale borrowing secured by non-core assets.
The borrower may incur asset-backed microfinancing up to [specific amount], provided the collateral is limited to non-core assets and fully documented.
Contingency-based debt
This variation allows debt contingent on predefined performance triggers.
The borrower may incur indebtedness contingent upon achieving [specific financial or operational milestone], provided such debt does not exceed [specific threshold] and is disclosed to the lender.
Strategic partnership debt
This variation facilitates borrowing as part of a strategic partnership agreement.
The borrower may incur indebtedness linked to a strategic partnership agreement, provided the debt is directly related to the partnership's operations and remains non-recourse to core assets.
Crowdfunding debt exception
This variation allows borrowing through crowdfunding platforms under strict conditions.
The borrower may incur indebtedness via crowdfunding platforms, provided the total raised does not exceed [specific amount] and repayment terms align with this agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.