What is a Credit Facility
A credit facility is a type of loan made in a business or corporate finance context, including revolving credit, term loans, committed facilities, letters of credit and most retail credit accounts. Companies frequently implement a credit facility in conjunction with closing a round of equity financing or raising money by selling shares of its 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.
BREAKING DOWN Credit Facility
A credit facility lets a company take out an umbrella loan for generating capital over an extended period of time.
Flexibility of a Credit Facility
A business may use a credit facility rather than reapplying for a loan each time it needs money. The company may take out a credit facility based on collateral that may be sold or substituted without altering the terms of the original contract. The facility may apply to different projects or departments in a business and be distributed at the company’s discretion. The time period for repaying the loan is flexible.
Terms and Structure of a Credit Facility
A credit facility agreement details 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 summary includes a brief discussion of the facility’s origin, the purpose of the loan and how funds are distributed. Specific precedents on which the facility rests are included as well. For example, statements of collateral for secured loans or particular borrower responsibilities may be discussed.
Repayment Terms of a Credit Facility
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.
Legal Provisions of a Credit Facility
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 cancelation. The section details penalties the borrower faces if defaulting 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.