Financing Agreements in General

The term financing agreement is a wide concept. A financing agreement can concern debt financing and equity financing. Forms of equity finance are e.g. own shares or instruments, which entitle the holder to shares, such as warrants. For further information, see [Equity financing]. Debt financing can be obtained from banks, financial companies, shareholders or other external personal or institutional investors.

The most common form of debt financing is a bank loan. Generally the granting of a bank loan requires that a security for a loan has to be lodged. The loan agreement sets out the duration of the loan, the amount of the loan, the form of repayment, the interest, other expenditures and necessary guarantees. It is advisable to conclude loan agreements in writing and this is what banks require.

Loan agreements are bilateral agreements, the terms and conditions of which both the borrower and the lender have accepted. Unilateral amendment of the agreement is not possible. For example, a bank does not have the right to unilaterally raise the interest rate of the loan, unless the parties have expressly agreed on it. Thus, the bank must first negotiate the new interest rate with the client, who has the right either to accept or reject the raise or terminate the agreement. It is advisable to read carefully standard terms of promissory notes and loans of banks in order to clarify the terms and conditions of a change of the interest rate for example.

Other common financing agreements are e.g. a bank account with an overdraft facility, a bill of exchange, a TyEL-reborrowing system (TEL = Employee Pensions Act), leasing, factoring and part payment agreement.

A bill of exchange is a document in which a giver of a bill (a drawer) requests another (a drawee) to pay a specific amount of money to a third person or to the drawer itself (so called draft) or in which a maker engages itself to pay an amount of moneys to another (so called negotiable promissory note). A document has to include a word ”bill of exchange” and an unconditional exhortation or demand to pay a specific sum of money. Information about a drawer, a drawee, maturity and all other information provided by the law has to be included in the bill of exchange.The Bills of Exchange Act is applicable to the bills of change and the formality of the Act has to be obeyed strictly. A bill of exchange may be used instead of a promissory note to prove the existence of a debt due and also as a means of payment.However, a bill of exchange may not be accepted from a consumer. A collection of a bill of exchange is often easier than the collection of other receivables, because debtors try to avoid a non-payment in order to prevent protest for non-payment. However, in recent years the usage of the bills of exchange has considerably decreased.

It is a question of TyEl –reborrowing, when funds which are accrued to a reserve on basis of TyEL- insurance premiums are lend back to a client company in accordance with the rules and regulations of the Ministry of Social Affairs and Health.An accrual of a specific minimum share of reserve and security are presumed, however. Usual securities are e.g. bank guarantee, guarantee given by Finnvera Oyj or a municipality and a guarantee insurance.A loan period is 1 to 10 years. The interest of the loan consists of a TyEL loan interest rate, which is used as a reference rate, and a margin, which is determined by a quality of security among other things. No corresponding re-borrowing system is related to insurances in accordance with the Self-Employed Persons' Pension Act (so called YEL insurances).

Leasing means a long-term hiring of fixed assets in connection of which e.g. a procurement of a production machine is paid by installments and the machine itself serves as a security. Often the lessee has right to buy the machine after the term of lease. See more about leasing agreements in [Leasing Agreements] and [Leasing].

Factoring means a financing of sales receivables. A financing company pays for the invoices assigned to it immediately e.g. 80 % and the rest 20 % after the buyer has made the payment. The company is granted a credit limit and the sales receivables assigned to the financing company serve as a security. The financing company charges interest for the used limit. The interest is often bound to the market rate of interest. In addition the financing company charges a service charge, which is generally a specific percentage of the amount of invoicing.

According to a hire-purchase agreement a seller delivers an object of a sale to a buyer, which pays the purchase price by two or more installments. In addition the seller generally retains the right of ownership in the object of the sale until the purchase has been fully paid. See more about the hire-purchase agreement in [Hire-Purchase Agreements].