Description of existing indebtedness: Overview, definition, and example
What is the description of existing indebtedness?
The description of existing indebtedness refers to a detailed account or summary of a company's current financial obligations, including loans, credit lines, bonds, or any other forms of debt that the company is required to repay. This description typically includes the amount of debt, the terms of repayment, interest rates, maturity dates, and any other relevant details. It is often included in financial statements, loan agreements, or credit reports to provide transparency about a company’s current debt load and its ability to meet future financial obligations.
In simpler terms, the description of existing indebtedness is an overview of all the debts that a company currently owes, including important details about those debts.
Why is the description of existing indebtedness important?
The description of existing indebtedness is important because it provides a clear picture of a company’s financial health and its capacity to take on additional debt. Lenders, investors, and other stakeholders use this information to assess the company's ability to meet its current obligations and to evaluate its creditworthiness. A company’s existing indebtedness can also influence future financing decisions, as high levels of debt might make it more difficult or expensive to borrow additional funds.
For SMB owners, understanding and clearly describing existing indebtedness is crucial for managing cash flow, securing financing, and ensuring the business remains financially stable.
Understanding the description of existing indebtedness through an example
Imagine you own a small manufacturing business that has a $100,000 business loan from a bank, with an interest rate of 5% and a repayment period of 10 years. Additionally, your company has a line of credit with a $50,000 limit, of which $30,000 is currently drawn. In your financial statement, you provide a description of existing indebtedness, which includes:
- Bank loan: $100,000, 5% interest rate, 10-year repayment period
- Line of credit: $30,000 drawn, $50,000 limit, variable interest rate
This description helps investors or lenders understand how much debt the company has and the terms under which it must be repaid.
Example of a description of existing indebtedness clause
Here’s how a description of existing indebtedness clause might look in a financial agreement or company report:
“The Company’s existing indebtedness as of [insert date] includes the following: (i) a term loan of $250,000 with an interest rate of 4.5%, payable in monthly installments over 5 years; (ii) a revolving credit facility of $100,000, of which $40,000 is currently drawn, with a variable interest rate; and (iii) bonds totaling $500,000, maturing on [insert date] with an interest rate of 6%. The Company agrees to provide updated information on existing indebtedness as required by the lender or investors.”
Conclusion
The description of existing indebtedness is an essential component of financial transparency, allowing stakeholders to understand a company’s current financial obligations. For SMB owners, providing an accurate and detailed description of existing indebtedness is key to managing financial relationships, securing additional funding, and ensuring that the business remains financially sound.
By keeping track of existing debts and understanding their terms, businesses can better plan for future financial needs, avoid over-leveraging, and maintain healthy cash flow to meet obligations on time.
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.