Authorization of borrowing: Overview, definition, and example
What is authorization of borrowing?
Authorization of borrowing refers to the formal approval or permission granted by an entity, such as a corporation, government body, or individual, to borrow money or incur debt. This approval process is typically required by an organization’s board of directors, shareholders, or other governing bodies before any borrowing activity can take place. The authorization sets the terms and conditions under which borrowing can occur, including limits on the amount that can be borrowed, the purpose of the borrowing, and the type of debt instruments that can be used (e.g., loans, bonds, lines of credit).
Authorization of borrowing is crucial to ensure that the borrowing activity aligns with the financial strategy, risk management policies, and legal obligations of the entity.
Why is authorization of borrowing important?
Authorization of borrowing is important because it ensures that the borrowing is done in a controlled and responsible manner. Without proper authorization, an organization could take on excessive debt or make borrowing decisions that negatively impact its financial stability or violate legal and regulatory requirements.
For businesses, authorizing borrowing is necessary for maintaining financial discipline and ensuring that any debt taken on serves the company’s strategic goals, such as financing expansion, covering operational costs, or refinancing existing debt. For individuals or government bodies, borrowing authorization provides a safeguard against over-leveraging and helps align borrowing decisions with broader fiscal policies.
Understanding authorization of borrowing through an example
Imagine a company that needs to raise capital to fund a new project. Before taking out a loan, the company’s board of directors must approve the borrowing decision. The board reviews the terms of the loan, such as the interest rate, repayment period, and the total amount to be borrowed, and formally authorizes the borrowing. Once the authorization is granted, the company can proceed with the loan agreement.
In another example, a government agency wishes to issue bonds to finance a new infrastructure project. Before issuing the bonds, the agency must receive authorization from the relevant legislative body or governing authority. This ensures that the borrowing is in compliance with the agency’s budget, debt limits, and legal constraints.
Example of authorization of borrowing clause
Here’s what an authorization of borrowing clause might look like in a corporate resolution or agreement:
“The Board of Directors hereby authorizes the Company to borrow up to $10 million under the terms specified in the Loan Agreement, subject to the conditions outlined in this resolution. The borrowing is for the purpose of financing the Company’s expansion project and shall be repaid over a period of five years at an interest rate not to exceed 5% per annum.”
Conclusion
Authorization of borrowing is a fundamental aspect of corporate governance, financial management, and fiscal responsibility. It ensures that borrowing decisions are made with appropriate oversight and in alignment with the entity’s financial objectives and obligations. By requiring formal authorization, entities can better control their debt levels, avoid taking on excessive risk, and maintain financial stability.
For businesses, governments, and other organizations, understanding and following proper authorization processes for borrowing is crucial to ensuring responsible financial management and long-term sustainability.
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.