Notice of borrowing: Overview, definition, and example
What is a notice of borrowing?
A notice of borrowing is a formal notification given by a borrower to a lender, typically under a loan agreement, to request a disbursement of funds. This notice includes details such as the amount to be borrowed, the proposed borrowing date, and any other terms required by the agreement. It ensures that the lender is informed and can prepare to provide the requested funds in accordance with the terms of the loan.
Why is a notice of borrowing important?
A notice of borrowing is important because it formalizes the borrower’s request for funds and ensures that the lender has sufficient time to review the request, verify compliance with the loan agreement, and make the funds available. This process helps maintain transparency, prevent miscommunication, and ensure adherence to the terms of the loan agreement.
For businesses, issuing a clear and timely notice of borrowing ensures access to funds without delays while protecting both parties by documenting the borrowing process.
Understanding a notice of borrowing through an example
Imagine a company has a revolving credit facility with a bank that allows it to borrow up to $5 million as needed. To access $1 million from the facility, the company sends a notice of borrowing to the bank, specifying the amount, the intended borrowing date, and the account to which the funds should be credited. This ensures the bank has time to process the request and make the funds available on the requested date.
In another example, a real estate developer with a construction loan submits a notice of borrowing to request $500,000 for project expenses. The notice includes documentation showing that the funds will be used for approved construction activities, ensuring compliance with the loan terms.
An example of a notice of borrowing clause
Here’s how a notice of borrowing clause might appear in a loan agreement:
“The Borrower shall provide the Lender with a written Notice of Borrowing at least [Insert Timeframe] prior to the proposed Borrowing Date. The Notice of Borrowing shall specify (i) the amount to be borrowed, (ii) the intended Borrowing Date, and (iii) the account to which the funds should be disbursed. All Borrowings are subject to compliance with the conditions precedent set forth in this Agreement.”
Conclusion
A notice of borrowing ensures a structured and transparent process for requesting funds under a loan agreement. For borrowers, it provides a formal mechanism to access funds while ensuring compliance with loan terms. For lenders, it allows time to review and process the request, reducing the risk of errors or miscommunication. Including a clear notice of borrowing clause in loan agreements promotes efficient and orderly financial transactions.
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.