What is it?
Funded debt is a contractual clause that governs the creation of a secured loan tied to a dedicated revenue source.
funded debt
UCC / CommercialLegal glossary term
Quick answer
Funded debt usually means a loan secured by a dedicated cash‑flow source. In contracts, it matters because the lender can seize that revenue if the borrower defaults. Before signing, verify the cash‑flow pledge and filing requirements.
Definitions
What is funded debt?
Legal Definition
When a borrower takes on debt that is backed by a specific source of cash flow, the obligation is called funded debt. The lender receives a secured claim on that cash stream and may enforce payment through foreclosure or acceleration if the borrower defaults. A key distinction is that unfunded debt relies on general credit rather than dedicated revenue.
Plain-English Translation
It’s like a kid getting a hall pass that lets him leave class only while the school bus runs; the pass is tied to the bus schedule, not just his permission.
Contract relevance
Why funded debt matters in contracts
If parties treat an unsecured loan as funded debt, the lender may lose priority and the borrower faces acceleration; the lender bears the risk of lost security.
Document context
Where funded debt appears in documents
| Document type | Section | Why it matters |
|---|---|---|
| Municipal bond indenture | Funding provisions | Shows which taxes or fees back the bonds |
| Commercial term loan agreement | Security clause | Creates lien on specific cash flow |
| UCC‑9 security agreement | Collateral description | Identifies pledged revenue stream |
| Franchise financing package | Repayment source clause | Links loan to franchise fees |
| Lease‑back financing document | Cash‑flow pledge section | Grants lender rights to lease proceeds |
Contract language
Common contract wording
| Contract wording | Plain-English meaning | What to check |
|---|---|---|
| Payments shall be made solely from the net cash flow of Project X | Loan is funded by Project X revenue | Confirm revenue source definition |
| Lender shall have a first‑priority security interest in all proceeds of the lease | Lender can claim lease income first | Verify priority language |
| Borrower shall establish an escrow account for the pledged cash flow | Cash flow will be held separate for lender | Ensure escrow terms are clear |
Red flags
Red flags to watch for
Wording examples
Clearer wording examples
Vague wording
“All cash flow”
Clearer wording
“Cash flow generated exclusively from Ticket Sales, net of taxes and refunds”
Vague wording
“Revenue”
Clearer wording
“Gross receipts from the operation of the arena, after deducting operating expenses”
Note: “clearer” means easier to read — not legally reviewed or guaranteed safe.
Pre-signature checklist
What to check before signing
1
Verify the exact cash‑flow source pledged.
2
Ensure the definition of “net” or “gross” cash flow is clear.
3
Confirm the lender’s lien priority over other creditors.
4
Check that required UCC‑9 financing statements will be filed.
5
Look for carve‑outs protecting operating expenses.
6
Review default acceleration and enforcement provisions.
Party impact
How funded debt affects each party
| Party | What this party should check |
|---|---|
| Lender | Must confirm that the pledged cash flow is sufficient and properly perfected |
| Borrower | Needs to ensure that pledged revenue won’t cripple ongoing operations |
Comparison
funded debt vs similar terms
| Related term | Plain meaning | Main difference from funded debt |
|---|---|---|
| Unfunded debt | Debt without a dedicated cash‑flow pledge | Lacks the specific revenue source that defines funded debt |
| Secured debt | Debt backed by any collateral, not necessarily cash flow | Funded debt is a subset tied to revenue streams |
| Revenue bond | Municipal instrument funded by specific taxes or fees | Similar to funded debt but issued by governments, not private borrowers |
Missing or vague
If funded debt is missing or vague
Without a clear definition, parties dispute which cash flows satisfy the pledge.
A lender may attempt to draw from unrelated accounts, while the borrower insists only project revenue counts.
This disagreement often triggers litigation over priority and possible acceleration.
Courts then interpret the ambiguous clause, creating costly uncertainty.
Document map
Document section map
| Contract section | What to inspect |
|---|---|
| Definitions | Look for the revenue source definition and “net cash flow” language |
| Security Interest | Verify lien description and priority ranking |
| Payment Terms | Ensure repayment schedule ties to the pledged cash flow |
| Default & Remedies | Check acceleration triggers and enforcement rights |
Visual model
Understand funded debt fast
An explainer image has not been generated for this term yet.
01
A city issues a revenue‑bond to fund a new arena, pledging ticket sales as funded debt; if ticket revenue falls, bondholders can claim the proceeds.
02
A franchisee borrows to open a restaurant, securing the loan with projected franchise fees; the bank can collect those fees directly if the franchisee defaults.
03
A landlord sells a building and retains a lease‑back, using the lease payments as funded debt to finance the purchase; the lender can enforce the lease cash flow.
Document context
How funded debt shows up in legal documents
Why does it matter?
If parties treat an unsecured loan as funded debt, the lender may lose priority and the borrower faces acceleration; the lender bears the risk of lost security.
When does it matter?
When a financing agreement specifies that repayment will come from a defined cash flow—such as lease payments or ticket sales—the funded‑debt provision becomes effective.
Where is it usually seen?
Appears in commercial loan agreements, municipal bond indentures, and UCC Article 9 security agreements.
Who is affected?
The lender gains a first‑lien security interest on the cash stream; the borrower risks loss of that revenue if it defaults.
How does it work?
First, the parties identify a revenue source that will service the obligation. Then the loan documents pledge that cash flow as collateral and file a financing statement under UCC §9‑102. Within 30 days of default, the lender may seize the pledged revenues.
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Wikipedia
Funded debt
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Where funded debt connects to real contract work
This layer links the term to nearby glossary entries, document use cases, and contract-risk guides so readers can move from definition to context without dead ends.
Glossary
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Source & disclosure
This page is an AI-assisted plain-English explanation based on LexPredict Legal Dictionary context and contract-review patterns. It is not legal advice. Meaning may vary by jurisdiction, industry, and exact clause wording.
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