Credit Facility

What Is a Credit Facility?

A credit facility is an agreement between a lender, such as a bank, and a borrower, such as a company or an individual, that sets out how much money the borrower can access and the terms for using it. Rather than receiving one fixed lump sum, the borrower can draw on the facility as needed, up to a stated maximum amount. Repayments and new borrowings can often be made repeatedly during the agreement's life, which is why facilities are sometimes described as flexible financing.

How It Works

Most credit facilities define three main elements: the maximum amount available, the period during which the borrower can draw funds, and the interest and fees charged. Interest is usually charged only on the amount actually drawn, not on the full limit. Lenders may also charge a commitment fee on the unused portion, which compensates them for keeping the funds ready. Some facilities are secured by collateral, such as receivables or property, while others are unsecured and rely on the borrower's creditworthiness.

Common types include revolving credit facilities, which allow repeated borrowing and repayment, and term facilities, which provide a set amount that is repaid on a schedule. Businesses often use them to manage cash flow, cover short-term working capital needs, or fund larger projects.

Why It Matters to Investors

Investors reviewing a company's financial statements often look at its credit facilities to understand its liquidity and debt obligations. Undrawn capacity can signal a cushion for unexpected expenses, while heavy use may point to tighter finances. Facilities also frequently include covenants, which are conditions the borrower must meet, such as maintaining certain financial ratios. Breaching a covenant can allow the lender to demand repayment or change terms, so these conditions are worth noting when assessing risk.