Credit Facility

What Is A Credit Facility?

Credit facilities refer to loans made to companies or generally within corporate finance, usually from a bank. Often taken on to secure liquidity, for example after a round of financing, there are several subcategories of credit facility but the term is a broad one encompassing the different types of open/ongoing loan agreement available to businesses. Usually credit facilities consist of large loan pools that are not drawn down all at once.

Functionality

In many ways, a credit facility offers a sort of financial insurance to a company. The conditions of the loan are usually highly flexible and don’t force the company to borrow predetermined amounts. For example, a company might take out a credit facility whilst negotiating a particularly poignant deal as a revenue back up if there are delays or problems.

Advantages

The key difference between a credit facility and a regular business loan is that renegotiation is not required every time the company wishes to draw on more of the loan. Whats more, after the initial terms of the credit facility are agreed, the company usually has a great deal of flexibility in terms of which areas of the business it may draw more of the loan to support. This can be of great benefit to the company when unexpected setbacks occur or if they need to adapt quickly to the changing financial climate affecting their specific sector.

Conditions

The terms and conditions of credit facilities vary enormously and depend on a large number of market factors including but not limited to; the company’s relationship with the financial institution; the company’s revenue; the company’s existing debt; the nature (risk assessment) of the business. Needless to say, high performing, well established businesses enjoy more flexibility and trust than a high risk start up with mounting debt when it comes to the terms of their credit facility. Furthermore, companies who are seen to be abusing their line of credit will find it harder to secure credit facilities in future, much like a personal loan.

Case Study

In early 2009, a company with approximately $30m in revenues was severely damaged by the global recession, cutting those revenues by 30%. In response to the sharp decline in revenues and likely heeding the impact of the global credit crisis, the company’s existing credit facility was effectively frozen. In turmoil, the company negotiated a new credit facility with 4 new lenders to supplement its existing, now frozen, facility. As their performance yoyoed over the following months, they were able to draw from (and repay to) the new credit facility until the market began to recover in mid 2011 when they were able to drop the new facility altogether and repair their relationship with the previous lender. Revenues had in fact increased to $35m. This study shows the power of a credit facility, as in its absence, a successful company would have otherwise folded.