More About Credit Facilities

What are the uses of a credit facility?

Every company needs capital to ensure continuity of business operations. However, in some cases, this capital is not immediately available to a company. For example, many companies use payments from clients/customers to pay for company expenses and if payments are delayed, then this capital is unavailable. In such cases, a company can use a credit facility to raise capital.

Credit facilities can also be used by a business to resolve any crisis related to expenses and cash flows. This often happens to small businesses. Availing a credit facility can help small businesses get around this problem.

While credit facilities offer a lot of flexibility to a company, they are not advisable for use in every situation. For instance, credit facilities should not be used to pay for periodic or fixed expenses which can be scheduled and paid for by other means. This is because a credit facility is akin to a loan and brings with it an interest rate and a range of other costs.”

Why use a credit a facility?

Many businesses choose to raise capital using credit facilities rather than by availing loans. This is because credit facilities offer much more flexibility as compared to loans.

Unlike a loan, a credit facility does not offer all the money requested in one go. With a credit facility, a business can request to raise some amount of money whenever the need for liquidity arises. With a loan, there is no possibility to raise additional money, unless a business decides to reapply for a new loan. On the other hand, credit facilities allow a business to raise capital whenever required, without having to reapply for loans. Credit facilities are usually renewed with every passing year. This allows a business to continue taking advantage of this form of financing whenever the need for capital arises.

Also, with a loan, a business needs to pay interest on the entire amount of money that has been borrowed. However, with a credit facility, interest is to be paid only on the part of money that has been used and not on the total amount of money requested. Moreover, loans typically have a longer repayment period as compared to credit facilities. The longer the repayment period, the more the amount of interest that needs to be paid.”

Who uses credit facilities?

Credit facilities are special types of loans which are offered to businesses in the context of corporate finance. Credit facilities are a very useful financial tool which are typically used by small and medium businesses and self-employed individuals.

Larger companies usually implement credit facilities in conjunction with selling shares or when closing a round of equity financing.”

Who offers credit facilities?

Many banks offer credit facilities to self-employed individuals and small and medium businesses. However, the terms and structure of a credit facility offered differs from one bank to another. The repayment terms and legal provisions offered by a credit facility also depend on the bank offering the facility. “