What is a Credit Facility?

A credit facility is a preapproved loan that can be drawn down at need. A business typically has a credit facility in place with its bank in order to fund its working capital needs on an ongoing basis. There is no need to draw down the entire amount available under the credit facility; it is simply available for use as needed. Repayments can be made as cash becomes available to the borrower, though the full amount must be paid back by the last date of the credit facility agreement. As such, it is a risk reduction tool for an organization. An example of a credit facility is a line of credit.

Credit Facility Fees

In exchange for making credit available to its clients, a bank charges a fee that is calculated as a percentage of the total amount of the credit facility. In addition, the bank charges interest on all loaned funds, which is typically set at a level a few percentage points above the current prime rate. The rate charged will depend on the bank’s evaluation of the ability of the borrower to pay back the loan.

Credit Facilities vs. Long-Term Loans

A credit facility is not intended for long-term borrowing arrangements, such as for the purchase of property. Instead, a firm would obtain a long-term loan, typically one that uses the assets to be acquired as collateral on the loan.