What is a 'Facility'

A facility is a formal financial assistance program offered by a lending institution to help a company that requires operating capital. Types of facilities include overdraft services, deferred payment plans, lines of credit, revolving credit, term loans, letters of credit, and swingline loans. A facility is essentially another name for a loan taken out by a company.

BREAKING DOWN 'Facility'

A facility is an agreement between a corporation and a public or private lender that allows the business to borrow a particular amount of money for different purposes for a short period of time. The loan is for a set amount and does not require collateral. The borrower makes monthly or quarterly payments, with interest, until the debt is paid in full. A facility is especially important for companies that want to avoid things such as laying off workers, slowing growth, or closing down during seasonal sales cycles when revenue is low. For example, if a jewelry store is low on cash in December when sales are down, the owner can request a $2 million facility from a bank, which is paid back in July when business is booming. The jeweler uses the funds to continue operations, and pays back the loan in monthly installments by the agreed-upon date.

There are a number of facilities available for short-term borrowers, depending on the needs of the borrowing businesses. These loans can be committed or uncommitted, and include:

1. Overdraft Services: Overdraft services provide a loan to a company when the company's cash account is empty. The lender charges interest and fees on the borrowed money. Overdraft services cost less than loans, are quickly completed, and do not include penalties for an early payoff.

2. Business Lines of Credit: An unsecured business line of credit gives corporations access to cash as needed at a competitive rate, with flexible payment choices. A traditional line of credit provides check-writing privileges, requires an annual review, and can be called early by the lender. A non-traditional line of credit provides business credit cards with quick access to cash and a high credit limit. Revolving credit has a specific limit and no set monthly payments, yet interest accrues and is capitalized. Companies with low cash balances that need to fund their net working capital needs will usually go for a revolving credit facility, which provides access to funds any time the business needs capital.

3. Term Loans: A term loan is a commercial loan with a set interest rate and maturity date. A company typically uses the money to finance a large investment or acquisition. Intermediate-term loans are under three years and are repaid monthly, possibly with balloon payments. Long-term loans can be up to 20 years and are backed by collateral.

4. Letters of Credit: Domestic and international trade companies use letters of credit to facilitate transactions and payments. A financial institution assures payment and completion of obligations between the applicant (buyer) and the beneficiary (seller).

RELATED TERMS
  1. Credit Facility

    A credit facility is a type of loan made in a business or corporate ...
  2. Committed Facility

    A committed facility is a credit facility whereby terms and conditions ...
  3. Uncommitted Facility

    An uncommitted facility is an agreement where the lender agrees ...
  4. Retail Credit Facility

    A retail credit facility is a financing method which can provide ...
  5. Evergreen Loan

    An evergreen loan is a loan that does not require the principal ...
  6. Term Loan

    A term loan is a loan from a bank for a specific amount that ...
Related Articles
  1. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  2. Personal Finance

    Different needs, different loans

    When it comes to loans, there are many different types according to your needs. Find out what options are available when it comes to borrowing money.
  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

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  5. 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.
  6. Insights

    An Introduction to Government Loans

    Government loans provide more benefits than private loans are available in many areas, including business, education, housing, disaster relief and more.
  7. Personal Finance

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  8. Taxes

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
  9. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  10. 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.
Trading Center