Contingent funding: Overview, definition, and example
What is contingent funding?
Contingent funding refers to financing that is provided based on certain conditions or events occurring in the future. It is a type of financial arrangement where the availability of funds is dependent on specific circumstances, such as the achievement of milestones, the occurrence of a particular event, or the fulfillment of certain conditions outlined in a contract or agreement. This type of funding ensures that the parties involved are protected, and funding is only provided when it is necessary or when agreed-upon conditions are met.
For example, a lender may agree to provide additional funding to a business if the business reaches a specific sales target or if a particular regulatory approval is obtained. Until the conditions are satisfied, the funding is not disbursed.
Why is contingent funding important?
Contingent funding is important because it helps manage risk for both the lender and the borrower. For the lender, it ensures that funds are not disbursed unless certain conditions are met, reducing the risk of lending to a borrower who may not be able to repay the loan. For the borrower, it provides an opportunity to secure financing based on achievable goals or milestones, giving them a chance to meet specific requirements before receiving the funding.
This type of funding is particularly useful in situations where the project or investment involves uncertainty or variables that are outside of the borrower’s control, such as regulatory approvals, sales performance, or market conditions.
Understanding contingent funding through an example
Imagine a startup company looking to raise capital for product development. An investor agrees to provide funding in two phases: the first phase includes an initial amount for research and design, and the second phase of funding is contingent upon the startup achieving a certain level of product sales within a year. If the sales target is met, the second phase of funding is unlocked, allowing the company to continue expanding its operations.
In another example, a construction company may receive contingent funding from a bank for a large project. The funding is contingent on the company obtaining the necessary permits and approvals before construction can begin. If the company fails to secure these permits, the funding will not be released.
An example of a contingent funding clause
Here’s how a clause related to contingent funding might appear in an agreement:
“The Lender agrees to provide the Borrower with a loan of up to $500,000. The second tranche of the loan, amounting to $200,000, will be disbursed only upon the Borrower achieving a minimum revenue of $1 million within six months of the initial loan disbursement.”
Conclusion
Contingent funding is a financing arrangement where funds are provided based on specific conditions or events that must occur before the money is made available. This approach helps manage risks and ensures that the parties involved are meeting predefined conditions or goals before additional funds are disbursed. It offers flexibility for borrowers while protecting lenders by limiting exposure to funding that may not be necessary or that is tied to uncertain outcomes. Understanding contingent funding can help businesses and investors navigate financial agreements with clearly defined conditions.
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.