Define: Financial Expense
Financial Expense refers to the costs a party incurs from borrowing or managing debt, including interest, commission, fees, discounts, prepayment charges, premiums, and similar payments. In a contract, it is often defined to determine how borrowing costs are calculated, reported, or restricted, particularly in loan agreements, financing covenants, and financial reporting clauses tied to leverage or interest coverage tests.
Legal accuracy standard set & glossary spot-checked by Imad Mohammed Nazar , Skadden-trained M&A lawyer, Legal Engineer at GenieAI
What Financial Expense Means in a Contract
Financial Expense is a defined term used to capture the full range of costs a borrower or contracting party bears in connection with debt or financing arrangements. Rather than referring only to interest payments, it typically sweeps in commission, fees, discounts, prepayment charges, premiums, and other amounts that arise because money has been borrowed or credit extended. Contracts define the term precisely because it often feeds directly into financial calculations that determine compliance with covenants or triggers for default.
The term is most commonly found in lending and financing documents, but it can also appear in general commercial agreements where a party's financial health or debt servicing capacity is relevant to the other party's risk assessment. Understanding what counts as a Financial Expense is essential because it shapes how much a party's true cost of capital is understood by counterparties, lenders, and auditors.
Because the definition can be broad or narrow depending on drafting choices, parties negotiating a Relevant Circumstances
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