Call-In: Overview, definition, and example
What is a call-in?
A call-in refers to a provision or request that allows one party (typically a lender or issuer) to require or demand that another party (such as a borrower or investor) provide additional capital, assets, or collateral to meet certain obligations, or to pay off part or all of a debt. A call-in is often used in financial and lending agreements, such as call-in loans, capital calls in investment funds, or collateral calls in margin lending. The purpose is to ensure the lender or creditor is protected and that the borrower or investor is maintaining an adequate level of security or investment.
For example, in a margin loan, the lender may issue a call-in if the value of the collateral (such as stocks or bonds) falls below a certain threshold, requiring the borrower to either deposit additional funds or securities to restore the balance.
Why is a call-in important?
A call-in is important because it acts as a protective mechanism for lenders, investors, and financial institutions. It ensures that they can manage risk and maintain the integrity of the loan or investment by securing adequate capital or collateral throughout the term of the agreement. For borrowers or investors, a call-in is a signal that their financial position has changed in a way that requires them to provide additional security or funds to meet their obligations.
For businesses or lenders, issuing a call-in ensures they can prevent losses due to market fluctuations, credit risks, or insufficient collateral. For investors or borrowers, it serves as a reminder to maintain sufficient collateral or funding to avoid default or unfavorable financial consequences.
Understanding call-in through an example
A venture capital firm invests in a startup and enters into an agreement that includes a capital call provision. The agreement specifies that if the company needs additional funding to meet operational costs, the venture capital firm can make a call-in to the investors, requiring them to contribute additional capital to the business. The firm issues a capital call to all investors, demanding additional funds to keep the business running.
In another example, a margin loan is secured by an investor’s stock portfolio. If the stock market experiences a downturn, the value of the portfolio decreases, triggering a call-in from the lender. The lender demands that the investor deposit additional cash or securities to restore the required level of collateral, otherwise, the lender may liquidate part of the investor’s portfolio to cover the shortfall.
An example of a call-in clause
Here’s how this type of clause might appear in a loan agreement or investment contract:
“The Lender may, at its discretion, issue a Call-In to the Borrower requiring the Borrower to provide additional collateral, funds, or assets if the value of the collateral falls below the required threshold, as determined by the Lender. The Borrower shall respond to any Call-In within [X] days of receipt, and failure to do so may result in default under this Agreement.”
Conclusion
A call-in is an important financial tool used to protect the interests of lenders and investors by requiring additional funding, collateral, or resources to be provided when necessary. Whether in the form of capital calls in investment funds or margin calls in lending, call-ins ensure that adequate financial backing is maintained throughout the term of an agreement. For borrowers and investors, understanding call-in provisions is critical to avoid unexpected obligations and maintain a stable financial position.
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.