When a business starts operating, the business owners make a financial commitment to each other and to the business.
A financial commitment occurs when an individual or entity assumes responsibility for covering certain expenses. Some financial commitments have an expiration date, while others are ongoing, with no specific end date. Financial commitments are liabilities for the party that undertakes to bear the cost. Parties who renege on such agreements often have to take legal action or other types of legal action.
When a business starts operating, the business owners make a financial commitment to each other and to the business. Some owners may agree to invest a certain amount of money in the business over a certain period of time. Other business owners invest minimal money but assume responsibility for some of the company’s debts in the event that the company becomes insolvent. In many cases, business owners seek financing from lenders and these lenders make a financial commitment to the business when loan applications are approved. Having closed the loan, the entrepreneurs assume the financial commitment to pay off the debt.
Government entities use taxpayer funds to pay for educational programs, military and other types of public services. The initial cost of such programs often exceeds short-term tax revenues, which means that government entities must borrow to cover short-term public expenditures. In many countries, government entities borrow in the form of general bond securities. These bonds are guaranteed against future tax receipts. This means that the government and taxpayers share responsibility for paying off the debt, so that both parties enter into a financial commitment to the bondholders.
In addition to companies and organizations, consumers often make financial commitments willingly or unwillingly. In many nations, there are laws that make parents responsible for covering their children’s basic living expenses. Separated parents may have to make child support payments and people who refuse may have their bank accounts or paychecks garnished. In some places, children can emancipate themselves from their parents, which means that they no longer have to live with them, but also that parents no longer have financial obligations to their children.
The laws of many nations mean that spouses have financial obligations to each other. This can result in the need for financial arrangements when couples get divorced. In some countries, financial obligations extend not only to spouses, but also to partners who are involved in legally recognized civil unions. The main earner in a marriage or civil partnership may have to make alimony payments to another partner or spouse after the legal separation takes effect.