Topping-Up Clause

We were anxious about opening a branch of No Filter, our selfie consulting firm, in Costa Rica. But then we met Fred, owner of a sloth-inspired apparel company in San Jose, and all our fears were allayed. Fred wanted to open a new shop here in the United States, and once we learned that, an idea began to form. We decided to enter into a little arrangement with Fred: No Filter would offer him a loan for $500,000 USD so he could get his shop set up here in the States, and Slothwear, Inc. would offer us a loan of ₡288,018,500 (that’s the approximate value of $500,000 in Costa Rican colóns) so we could get our business going in Costa Rica. This is what’s known as a parallel loan.

Our particular parallel loan comes with what’s known as a “topping-up clause,” which is oh so handy for businesses like ours that are looking to get started in a new country, but are maybe a little wary about potential currency fluctuations and devaluations. This clause says that, if one currency gets devalued, the borrower of that currency has to make payments to reset the equilibrium between the loan amounts. If the currency gets revalued, then the lender of that currency is the one who has to make payments.

The goal of the topping-up clause is to make sure that the two loans are as close to equal as possible. Because if the dollar suddenly drops in value but the colón does not, then our loan to Fred is suddenly worth less than his loan to us, which is no fair. The topping-up clause exists to make sure that doesn’t happen.