Deficiency Agreement

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DEFINITION of 'Deficiency Agreement'

An arrangement in which a party provides a firm with funds to cover any shortfalls arising from capital or cash flow restraints, allowing the company to service its debt. A deficiency agreement will usually have a cumulative limit specified by the lending party.

INVESTOPEDIA EXPLAINS 'Deficiency Agreement'

Deficiency agreements allow firms to avoid the possibility of default during difficult periods. These types of agreements will usually involve parties that have an interest in the company and want to see it continue operations.

While a deficiency agreement will cover an entire company, it may be specified to protect a smaller aspect of the business. For example, a new project may have unstable cash flows and be unable to generate revenues until it reaches a certain level of operations. To prevent the project from failing, a deficiency agreement could provide it with enough cash until a revenue steam is established.

RELATED TERMS
  1. Default

    1. The failure to promptly pay interest or principal when due. ...
  2. Default Risk

    The event in which companies or individuals will be unable to ...
  3. Shortfall

    The amount by which a financial obligation or liability exceeds ...
  4. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
  5. Debt Service

    The cash that is required for a particular time period to cover ...
  6. Administrative Order On Consent ...

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