Definition
A credit facility is a type of business loan, often as part of the overall process of arranging equity financing. Types of credit facilities include: revolving credit, term loans, letters of credit and lines of credit.
The credit facility can be one loan or a series of loans. Loans made through the credit facility can be short-term or structured for longer repayment but must be restricted to a particular industry.
A credit facility generally permits the client to pursue their venture prior to the credit facility issuer receiving the collateral from the client. Substitution of collateral is permitted. For example, a business that uses a warehouse for collateral may sell that warehouse due to a business need and substitute another hard asset as collateral.
A credit facility is used to guarantee assets between a buyer and a seller of goods and/or real property. A company may also use it to create liquidity. The credit facility issuer pledges its resources based on the required and acceptable collateral delivered by the client.
One of the benefits of a credit facility is that it does not have to be associated with one project. This umbrella approach eliminates the need to obtain financing for each project, and over time can help to minimize the amount of interest that is repaid with the principal.
Flexibility is also a key advantage to a credit facility. Since the resources associated with the facility can be used for anything the business desires, it is relatively easy to divert funds wherever they are needed.
Considerations
A key consideration for any company is how it will incorporate debt in its capital structure. The company must look at its capital structure as a whole, determining how much capital it needs immediately and over time, and the combination of equity and debt that it will use to fulfill those requirements.
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