A credit facility is a type of loan made accessible in a business or finance context. It allows the borrowing business to take out money over a long period of time rather than reapplying for a loan each time it needs money. In other words, a credit facility lets a company take out a covering loan for generating capital over a long period of time.
Various types of credit facilities include revolving loan facilities, committed facilities, letters of credit, and most retail credit accounts.
What You Should Know About Credit Facility
- A credit facility is an agreement between a lender and a borrower that allows for greater flexibility than traditional loans.
- Types of credit facilities include revolving loan facilities, retail credit facilities (like credit cards), committed facilities, letters of credit, and most retail credit accounts.
- A credit facility often allows a company to have greater control over the amount of debt, timing of debt, and use of funds compared to other types of lending agreements.
- However, a credit facility usually comes with debt covenants, additional maintenance fees, withdrawal fees, and is more difficult to secure.
- Credit facilities’ terms and particulars, like those of credit cards or personal loans, are dependent on the financial condition of the borrowing business and its unique credit history.
How a Credit Facility Works
Credit facilities across the financial market is a way of providing funding for different purposes.
Companies frequently implement a credit facility in conjunction with closing a round of equity financing or raising money by selling shares of their stock.
A key consideration for any company is how it will incorporate debt in its capital structure while considering the parameters of its equity financing.
However, a company may take out a credit facility hung on collateral that may be on sale or as a substitute without altering the terms of the original contract.
The facility applies to different projects or departments in the business and be distributed at the company’s discretion.
The period for repaying the loan is flexible and like other loans, depends on the credit situation of the business and how well they have paid off debts in the past.
The summary of a facility includes a brief discussion of the origin, the purpose of the loan, and how the funds is going to be used .
Specific information on which the facility rests are inclusive as well. For example, statements of collateral for secured loans or particular borrower responsibilities may be a topic of discussion.
Special Considerations for a Credit Facility
A credit facility agreement highlights the borrower’s responsibilities, loan warranties, lending amounts, interest rates, loan duration, default penalties, and repayment terms and conditions.
The contract opens with the basic contact information for each of the parties involved, followed by a summary and definition of the credit facility itself.
The terms of interest payments, repayments, and loan maturity are detailed. They include the interest rates and date for repayment, if a term loan, or the minimum payment amount, and recurring payment dates, if a revolving loan. The agreement details whether interest rates may change and specifies the date on which the loan matures, if applicable.
The credit facility agreement addresses the legalities that may arise under specific loan conditions, such as a company defaulting on a loan payment or requesting a cancellation.
The section details penalties the borrower faces in the event of a default and steps the borrower takes to remedy the default. A choice of law clause itemizes particular laws or jurisdictions consulted in case of future contract disputes.
Forms a Credit Facility Can Take
A credit facility can take different formats. Let’s look at the most common forms of a credit facility:
This facility is a method of financing essentially, a type of loan or line of credit retailers and real estate companies make the most use of. Credit cards are a form of retail credit facility.
It is a type of loan by a financial institution that provides the borrower with the flexibility to draw down or withdraw, repay, and withdraw again. Essentially it’s a line of credit, with a variable (fluctuating) interest rate.
Is a source for short or long term financing agreements in which the creditor is committed to providing a loan to a company as long as the company meets specific requirements set by the lending institution. The funds are provided up to a maximum limit for a specified period and at an agreed interest rate. Term loans are a typical type of committed facility.
Credit Facilities Advantages and Disadvantages
The following are the advantages of credit facility:
- This facility provides a company financial flexibility
- It strengthens the relationship between a financial institution and a company
- It also increases the credit rating of a company
- May require less administrative burden to secure future debt
Its disadvantages include:
- This facility sometimes results in additional maintenance and withdrawal fees
- May be difficult for younger or too risky for young companies to secure
- It often requires a burdensome process to secure
- May require additional administrative burden to maintain loan covenants