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.
How Credit Facilities Work
A credit facility lets a company take out an umbrella loan for generating capital over an extended period of time. A business may use a credit facility rather than reapplying for a loan each time it needs money.
[Important: A credit facility is a type of loan made in a business or corporate finance context, such as revolving credit, term loans, and committed facilities.]
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 the business and be distributed at the company’s discretion. The time 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 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.
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 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.
- A credit facility is a type of loan made in a business or corporate finance context.
- They can include revolving credit, term loans, committed facilities, letters of credit, and most retail credit accounts.
- Credit facilities, like credit cards or student loans, are dependant on the business and their unique credit history.