Floating Rate Funding Agreement

A floating rate funding agreement (FRFA) refers to a type of loan agreement where the interest rate charged on the loan varies based on an index, benchmark, or reference rate. FRFAs are typically used in the corporate and banking sectors and are often utilized to provide companies with flexible financing options.

The interest rate for an FRFA is typically tied to a pre-defined benchmark, such as the London Interbank Offered Rate (LIBOR) or the Prime Rate. The interest rate on the loan is then adjusted periodically, usually every three or six months, based on changes to the benchmark rate. This means that the interest rate on an FRFA can go up or down depending on changes in the benchmark rate.

One of the main benefits of an FRFA is that it provides flexibility to both borrowers and lenders. Borrowers can take advantage of lower interest rates if the benchmark rate goes down, while lenders can adjust interest rates upwards if the benchmark rate increases.

FRFAs can also be structured in a variety of ways to suit the needs of both parties. For example, a borrower may choose to enter into an FRFA with a “floor” that will ensure that the interest rate cannot fall below a certain level, even if the benchmark rate decreases significantly. Similarly, a borrower may choose to enter into an FRFA with a “cap” that will limit the amount of interest they are required to pay, even if the benchmark rate increases significantly.

However, there are some risks associated with FRFAs for both borrowers and lenders. For borrowers, there is the risk that interest rates will rise significantly, increasing their borrowing costs. For lenders, there is the risk that the borrower will default on their loan, leaving the lender with a higher interest rate than they would have received if they had entered into a fixed-rate loan agreement.

Overall, FRFAs are a useful financing tool for companies looking for flexibility and the ability to take advantage of potentially lower interest rates. However, borrowers should carefully consider the risks associated with an FRFA and work with a trusted lender to ensure that they are entering into an agreement that meets their needs and financial goals.