Running a joint venture brings many benefits and advantages. That is why there are many such companies today, and, in the business environment, several actions ensure the best possible organization.
One of these actions is known as a “cash call”; for those who don’t know much about business terms, it can be slightly confusing. Although, with proper explanation, it is fairly easy to understand.
What is a joint venture?
Before we begin to explain a cash call, it is necessary to understand what a joint venture is because, throughout this text, we will come across the words “joint venture” more than once to define a cash call.
A joint venture is an agreement by several companies or corporations to carry out a certain negotiation or project. In a certain way, temporarily, together, they constitute a company.
Joint ventures are also known as business associations. Because the realization of a project or business is temporary, these alliances are not forever and usually last for the project’s duration.
What is an operating partner?
As a joint venture is defined, it is necessary to understand the term operating partner to understand the full scope of a cash call.
An operating partner is a person within the Joint Venture in charge of carrying out all operations concerning the alliance, where the participation of each of the partners would normally be required.
Several persons can carry out the role of an operating partner. First and most commonly, the operating partner is one of the participants in the joint venture.
It is also fully valid when the operating partner is a subsidiary of another of the participants and when another company is hired to fulfill the role of operating partner for the joint venture.
Regardless of which of the three cases mentioned above applies to the operating partner of the joint venture, the partner must be a fully qualified person with relevant project-related expertise.
What is defined as a cash call?
Having made the two previous concepts clear, explaining a cash call will be much simpler and, above all, understandable even to the most inexperienced in the subject.
A cash call is a request made by the operating partner of a company to ask for the cancellation of various invoices before their corresponding payment date.
The cash call is made to all non-operating partners of the joint venture. However, each request is sent to each partner. In other words, it is not a collective request but an individual one.
All partners receive the cash call when it is necessary to resort to prepayment of an invoice or various expenses about the project. However, most of the time, the partners do not pay the same amounts.
The value of the money for the money call is proportional to the partner’s percentage share in the joint venture. The same applies to each of the partners up to 100%.
For example, if there are five partners and each partner has a 20% interest in the joint venture, they are entitled to pay 20% for paying the expenses to be incurred in a certain period.
The above may vary according to conditions established in cash call agreements because such modality must be agreed upon between the companies before forming their alliance.
Other aspects to consider are cash calls
Cash calls have many variable considerations for each joint venture where they are applied. However, there are three essential aspects to consider.
An operating partner can make a cash call to itself
It is quite logical to ask (because of the above) whether an operating partner, who has a direct stake in the company as an additional partner, can make a cash call on himself.
The answer is yes. An operating partner may request the prior cancellation of the future expense. In such a case, the active partner must make a bank transaction from his account to the company’s account.
Must agree upon cash calls in advance
An operating partner does not have the right to make a cash call if they did not previously plan this method in the agreement made for the joint venture during the realization of the project.
Therefore, before making a cash call, the operating partner must verify that there is an agreement for it. It must also check exactly all the conditions set for its execution.
Each joint venture may agree on unique and convenient terms for its cash call. Therefore, the operating and non-operating partners should be aware of these conditions to avoid unpleasant situations.
Cash calls are usually made months in advance
Those who receive a cash call should not be surprised if they made the request several months before the invoice payment. Normally, it is carried out up to 3 or 4 months in advance.
The non-operating partner is notified about the necessity of the previous cancellation of a certain invoice. When the invoice is issued, the partner must pay its share.
And, when it is time to pay the invoice, the operating partner is responsible for canceling the invoice with all the funds previously acquired from the non-operating partners and himself if it is the case.