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Deficiency Agreement

Deficiency Agreement

What Is a Deficiency Agreement?

A deficiency agreement is an arrangement where a sponsor or another party gives a firm funds to cover any shortages emerging from working capital, cash flow, or revenue restrictions, permitting the company to service its debt. A deficiency agreement will generally have a cumulative limit indicated by the lending party.

A deficiency agreement may likewise be called a cash deficiency agreement or a make-up arrangement.

How a Deficiency Agreement Works

Deficiency agreements permit firms to stay away from the possibility of default during troublesome periods. These types of agreements will ordinarily include parties that have an interest in the company and need to see it proceed with operations in the long term. For instance, consider a situation wherein at least one of a second party's products are not selling as well as anticipated. A deficiency agreement would permit the borrower to service its debt without the whole company taking a chance with default.

While a deficiency agreement will cover a whole company, safeguarding a more modest part of the business might be determined. For instance, another project might have unsteady cash flows and not be able to create revenues until it arrives at a certain level of operations. To keep the project from coming up short, a deficiency agreement could give it enough cash until a revenue stream is laid out.

In project finance, particularly construction, a cash deficiency agreement incorporates one party accommodating the other up to a certain amount, with the goal that the subsequent party may briefly reduce its cash flow issues until profitability is reestablished. This arrangement is utilized to guarantee there are an adequate number of funds to meet the project's fixed charges.

In the oil and gas industry, throughput contracts some of the time incorporate a throughput and deficiency agreement part to work with indirect financing alternatives. A throughput contract is an agreement between two gatherings wherein a service or commodity is secured by one of the gatherings for a predetermined period of time. A business might utilize throughput contracts as an indirect form of financing for projects, by giving access to materials instead of genuine money.

Features

  • These types of agreements will as a rule include parties that have an interest in the company and need to see it proceed with operations in the long term.
  • A deficiency agreement may likewise be called a cash deficiency agreement or a make-up arrangement.
  • Deficiency agreements permit firms to stay away from the possibility of default during troublesome periods.
  • A deficiency agreement is an arrangement where a sponsor or another party gives a firm funds to cover any deficits emerging from working capital, cash flow, or revenue restrictions, permitting the company to service its debt.
  • A deficiency agreement will typically have a cumulative limit indicated by the lending party.