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Funding Agreement

Updated on April 6, 2024
Article byShrestha Ghosal
Edited byShrestha Ghosal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Funding Agreement?

Funding agreement is a legally binding contract between an investor and the recipient of the funds. The agreement contains the terms and conditions of the financial assistance that would be provided to the receiving entity. It also outlines the associated rewards, risks, and obligations for the parties entering into the agreement.

Funding Agreement

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Source: Funding Agreement (wallstreetmojo.com)

In this agreement, the investor offers a lump sum payment to the recipient, who, in return, ensures a fixed return rate over a specified period. These financial instruments are preferred for their low risks and assurance of a fixed income. However, the return amounts are usually low due to the low risk involved.

Key Takeaways

  • A funding agreement is a legally binding document that outlines the terms and conditions of a financial arrangement. It is formulated by an investor and an entity that receives the funds.
  • The agreement serves as a framework for guiding the involvement of both parties. It specifies the timelines, risks, rewards, and obligations for the entities involved.
  • These agreements offer a low-risk and fixed-income return to the investors. However, the return amount is usually modest because of the instrument’s low-risk nature.
  • The agreements are legally enforceable in the court, and any dispute can be legally resolved.

How Does Funding Agreement Work?

A funding agreement is a legal contract between an investor and a receiving entity. It provides the terms and conditions of the financial support exchanged between the parties. The agreement works as a framework that guidelines the risks, responsibilities, expectations, and anticipated returns associated with the financial partnership. In the agreement, an investor promises a lump sum amount to a receiving entity. The entity, in return, promises to repay the amount with a fixed rate of return over a specified period.

Funding agreements have a fixed-income and low-risk nature. However, due to the low risk involved, the return rates are usually low. The agreements are also enforceable by law if they match the basic requirements of a valid contract, including consideration, offer, acceptance, and a lawful purpose. If the receiving entity fails to meet the obligations of the agreement, the investor may have the right to demand the repayment of funds, terminate the agreement, and seek other legal remedies as mentioned in the agreement.

Common Sections

The standard sections in a funding agreement include the following:

  • The company formation
  • Definitions
  • The capital contribution and percentage of interests
  • The allocation of net income and net loss
  • Distributions
  • Books of account and other financial records
  • Powers
  • Transfer of interest by the members
  • Members resignation
  • Voting and notices
  • Amendment of the agreement
  • Miscellaneous clauses

Sample

The funding agreement sample has been provided below:

Source

Types

The types of funding agreements are as follows:

  • Grant: The grant funding agreements are non-repayable financial support that are offered for specific purposes. Charitable entities, government agencies, and foundations often provide them.
  • Loan: These are financial assistance provided during a specific period. However, they come with the repayment clauses. They usually charge interest for the duration of the loan term.
  • Investment: These are funding contributions made in return for equity or ownership interest in a project or business. This agreement has the possibility for financial gains.
  • Sponsorship: These agreements assist the sponsor in exchanging marketing exposure advantages.

Examples

Let us study the following funding agreement examples to understand this contract:

Example #1

Suppose Jake wanted to start a business. He decided to start a pharmacy store, but he did not have the necessary funds to start his business. Jake’s friend Sam expressed his interest in wanting to invest in Jake’s business. They drafted an agreement together that outlined the terms and conditions of the financial assistance that Sam would provide to Jake. It also comprised of the duties and responsibilities that Jake would perform and his obligations toward Sam. They entered into a legally binding contract, which marked the beginning of the financial partnership.

Example #2

In a meeting on February 6, 2024, the City Commissioners in ​​Great Falls and Cascade County granted a $210,931.50 contract for a splash pad at the Electric City Water Park. The staff suggested the contract’s approval to Play Space Designs for the installation and purchase of a splash pad package in the water park. The Community Development Block Grant funds will finance the initiative as it benefits the general population and lies between a low to moderate-income area. The commissioners approved the CDBG funding agreement in July 2022.

Importance

The importance of a funding agreement is:

  • It offers the terms and conditions for a financial partnership. The agreement ensures that the parties involved are clear about the expectations and obligations of the partnership. An appropriately drafted agreement may help protect the investor and the investee’s interests.
  • The agreement assists in providing the terms of the funding. It includes the funding amount that is being provided, the interest rate, the repayment period, and the payment schedule. It also contains the guidelines for any penalties for non-compliance and clauses for contingencies. The parties agreeing must ensure that the terms are fair and reasonable and recognize the potential benefits, rewards, and risks involved.
  • This agreement serves as the basis of the legal framework. It can include provisions for resolving any disputes, intellectual property rights, and confidentiality clauses. The parties must thoroughly understand the provisions in the agreement and comply with them to avoid any legal consequences or disputes.
  • These agreements may include explicit expectations and timelines for the parties involved. It may include the period for attaining specific goals, reporting needs for the investor and the business, and the deadlines for submitting necessary documents. The agreement aids the parties in managing their resources and ensuring that the partnership stays on track.
  • This agreement may outline the overall business strategy and goals. It includes recognizing the specific utilization for the funding, like expansion, marketing, and product development. It may also include the anticipated returns on the investment. If the agreement aligns with the general strategic plan, the businesses may ensure that they are utilizing their resources efficiently and effectively. It also assists businesses in achieving their long-term goals and objectives.

Frequently Asked Questions (FAQs)

1. Is a GIC the same as a funding agreement?

Guaranteed Investment Certificates (GICs) are occasionally considered as these agreements. However, the term is usually reserved for contracts that are sold to non-qualified institutions. These term deposits serve as secured investments, implying that individuals receive back the amount they invested at the end of the specified term.

2. How do funding agreement-backed notes work?

These agreement-backed notes are securities that are backed by an agreement of funding. It is a deposit-type contract. The life insurance companies issue these contracts, and they ensure a stream of expected fixed payments over a specific period.

3. What is a forward funding agreement?

These agreements are also known as Development Finance Agreements. Individuals enter into these contracts when someone who is financing the creation of a building offers interim funding to make development happen. The agreement enables the investors to get access to a fixed return on their investments.

4. What is a tax funding agreement?

This legal contract is an agreement that the members of a multiple-entry consolidated (MEC) group deliberately enter into. This agreement offers a method through which the organizations in a MEC group can divide the responsibility for the amount of tax payable among themselves on an ongoing basis.

This article has been a guide to what is Funding Agreement. Here, we explain it with its sample, common sections, types, examples, and importance. You may also find some useful articles here –

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