Affiliates of borrower: Overview, definition, and example
What are affiliates of borrower?
Affiliates of a borrower refer to individuals or entities that are connected to the borrower through ownership, control, or other significant relationships. These could include parent companies, subsidiaries, or other businesses under common control or ownership. In a loan agreement, the term "affiliates of borrower" is often used to specify whether the borrower’s affiliates are subject to the same terms or obligations as the borrower, or if they can be held accountable for the borrower’s actions.
For example, if a company borrows money and its parent company is involved in the agreement, the parent company might be considered an affiliate of the borrower.
Why are affiliates of borrower important?
Affiliates of the borrower are important because they may be held liable or responsible for fulfilling certain obligations under the contract, depending on the terms agreed upon. Lenders may want to include affiliates in the agreement to ensure that the entire corporate group is accountable, especially if the borrower is financially unstable or unable to meet its obligations. Understanding the relationship between the borrower and their affiliates helps lenders assess the risk and structure the agreement accordingly.
For businesses, understanding how affiliates are treated in loan agreements ensures that there are no unexpected liabilities or obligations that could arise from the actions of related entities.
Understanding affiliates of borrower through an example
Imagine a company, TechSolutions, that takes out a loan to expand its operations. The loan agreement includes a clause that states the parent company, TechHoldings, is an affiliate of the borrower. If TechSolutions defaults on the loan, TechHoldings, as the affiliate, might be called upon to help fulfill the loan obligations or take on additional responsibilities under the agreement.
In another case, a startup might borrow funds and have its affiliates (such as a subsidiary company) involved in the agreement. If the borrower defaults, the lender might seek to hold the startup’s affiliates responsible for certain payments or guarantees.
An example of an affiliates of borrower clause
Here’s how an affiliate clause might look in a contract:
“The Borrower agrees that its affiliates, including but not limited to [Insert Names of Affiliates], shall be jointly and severally liable for any obligations or payments due under this Agreement.”
Conclusion
Affiliates of the borrower play a significant role in loan agreements by expanding the scope of responsibility and ensuring that related entities are held accountable. By including clear terms around affiliates in loan contracts, both parties can understand the scope of their liabilities and obligations, preventing confusion or potential legal issues down the line. For lenders, ensuring that affiliates are included in the agreement provides an extra layer of security, while for borrowers, understanding these terms is essential to managing the risks associated with their affiliated entities.
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.