What is a Credit Facility?

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Unlike personal loans where the person borrowing the funds and the collateral are not likely to change, loans in the world of business require additional flexibility in order to meet the needs of the business as well as satisfy the requirement of the lender. Accomplishing this seemingly difficult task is done by using a credit facility which is an overall credit line that can be broken into multiple credit lines and collateral.

Types

Credit facilities may be either long-term or short-term. They may also be used either as a single loan, or as an umbrella for multiple loans.

Function

The purpose of a credit facility is to provide capital to the borrower for multiple purposes and time frames without the need to structure a loan for each one.

Benefits

A credit facility generally permits the borrower to substitute collateral for the loans at the lender's discretion without having to redo the loan contract. Thus, a business that uses a warehouse for collateral, may sell that warehouse do to business need and substitute another hard asset as collateral.

Considerations

Credit facilities can be quite large and may encompass multiple terms, repayment schedules, and interest rates, or a credit facility can provide a single large pool of capital with one set of terms. A business should consider which provides the proper tools for managing the business' credit. In other words, is maximum flexibility most important, or is having known parameters for careful planning and budgeting more important.

Time Frame

Credit facilities may be for any duration agreed upon by both lender and borrower. Some credit facilities, particularly those tied to real estate, may have 30 year terms or longer, while other facilities, generally those tied to operating expenses, may have much shorter terms.

Warning

Investors often react negatively to businesses when credit facilities come close to being maxed out. This sometimes suggests trouble for the business and that the business is trying to make up for those issues by borrowing.

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