It sounds like one of those good problems...like having more hundreds than you can fit in your suitcase, or having too many models texting you for a date. But in finance, it refers to a situation that might force a borrower to make a payment on a debt they owe.
Your company borrows $100,000. You are supposed to pay $1,500 a month, which is 10% of your monthly profit of $15,000 a month. You then decide to sell a bunch of stock in the company, raising $500,000. Your loan agreement has an excess cash flow provision, and the stock sale triggers a payment. The loan stipulates that up to 10% of your excess cash flow (the $500,000 you raised from the stock sale) has to get paid back to the lender. So you write them a check for $50,000.
The excess cash flow rules depend on the individual loan agreements, and would be negotiated ahead of time. The goal on the bank’s part is to avoid getting stiffed if the company starts to liquidate.
Related or Semi-related Video
Finance: What is Debt-to-EBITDA?58 Views
Up Next
What is free cash flow? Free cash flow is the leftover cash a company has on hand from revenues after capital expenses are deducted. It is consider...