What is an 'Accordion Feature'

An accordion feature is a type of option that a company can buy that gives it the right to increase its line of credit or similar type of liability with a lender. Companies typically purchase an accordion feature in anticipation of the need for more working capital for possible expansion opportunities.

BREAKING DOWN 'Accordion Feature'

For example, suppose company ABC has established a $100,000 line of credit with the Bank of XYZ. Company ABC has also purchased an "accordion feature" that lets it increase its total debt commitment of $100,000 to $150,000 because Company ABC believes it will need an additional $50,000 if it decides to add a new sales division. This term's origin is derived from how an accordion can be pulled and stretched in a manner that lengthens its total size.

Mutual Benefit

The accordion feature creates a positive benefit for all parties involved in a loan agreement. Loan terms with an accordion feature are well suited for situations where a business shows great potential for accelerated growth, while at the same time there are indications of risks from uncertainty due to factors for which the business has no control. A lender is able to somewhat mitigate the risk of the noted uncertainty by increasing a line of credit incrementally, with each increment made contingent on the future realization by the business of specific predetermined expectations, and an increased certainty of the aforementioned uncontrollable factors. All the expectations are negotiated and a pro forma plan is agreed upon by all parties.

For businesses, most notably a business with a novel and innovative idea or product, the accordion feature is beneficial in several ways. First, it allows the business to put forth more favorable terms for lenders. This serves to attract more lenders to businesses seeking credit that would otherwise be deemed as too risky. By making additional credit increases contingent on the business exceeding pro forma expectations, the lenders focus more on the opportunity than the risk. Second, the terms for the entire line of credit, including all the incremental increases, are negotiated at the onset. Thus, if and when a credit increase takes place, all the terms are predetermined, and the credit increase can be expedited. This is especially important for the new business that has exceeded its expectations, and rapid expansion may be warranted to capitalize on untapped markets before competitors seize the opportunity. Taking time to rehash credit terms may be counterproductive.

Another important characteristic of the accordion feature that benefits the business is the credit increases are optional. Consequently, if the business can expand without incurring additional debt, it can make that decision.

RELATED TERMS
  1. Debt Accordions

    Debt accordions are provisions that allow a borrower to expand ...
  2. Credit Limit

    Credit limit is the amount of credit that a financial institution ...
  3. Credit Agreement

    A credit agreement is a legally binding contract documenting ...
  4. Trade Line

    A trade line is a record of activity for any type of credit extended ...
  5. Credit Control

    Credit control includes the strategies a business uses to encourage ...
  6. Credit Risk

    Credit risk is the chance of loss due to a borrower's defaulting ...
Related Articles
  1. Small Business

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.
  2. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  3. Investing

    Revolving Credit vs. Line of Credit

    Revolving credit and a line of credit are arrangements made between a lending institution and a business or individual.
  4. Managing Wealth

    How To Get A Business Loan If You Have Bad Credit

    Your business' credit standing may be less than stellar, but you can still get financing. We show you how.
  5. Personal Finance

    Is Your Credit Score at 850? It Can Be!

    Use these tips to increase your credit score and your ability to get low interest rates on loans.
  6. Personal Finance

    How To Overcome Bad Credit

    Some lenders can look overlook your credit score and assess other factors that fairly determine if you are a reasonable credit risk.
  7. Personal Finance

    Credit Repair: How to Improve Your Credit Score

    There is no quick fix for a bad credit score, but there are several strategies you can take to improve your credit rating and save money over the long term.
  8. Personal Finance

    Why You Should Improve Your Credit and How to Do It

    With credit playing a big role in many financial decisions, it is important to maintain good credit.
  9. Personal Finance

    How to Establish Credit with No Credit History

    Even if you have no credit history, taking action to begin establishing your credit history today is a wise move. Learn more in this article.
  10. Personal Finance

    Build Your Credit Score

    Here are four good ways to build your credit score when you're starting from scratch. Do it right and you'll end up with excellent credit.
RELATED FAQS
  1. Is it possible to have a credit limit that’s too high?

    Avoid these pitfalls when working with high credit limits, and learn how to increase your credit score by increasing your ... Read Answer >>
  2. What is the difference between closed-end credit and a line of credit?

    Understand the difference between closed-end credit, open-end credit, and lines of credit. Then find out how each are used ... Read Answer >>
Trading Center