What is a Credit Facility in England?

As a business owner, you might access additional financing to fund various expenses at different stages in your growth. One way of doing this is through a credit facility. These are similar to a standard loan but do not usually prescribe a set purpose for the money’s use. This form of financing gives you a flexible method of fulfilling your company’s financial obligations, including if you run into cash flow problems. Credit facilities can take a few different forms, such as revolving credit facilities and term loans. This article will explain what a credit facility is, how it works, and why your business might want to consider having at least one.

What is a Credit Facility?

Put simply, a credit facility is a type of loan where the borrower can take out money over a period of time (and usually on an ongoing basis) rather than having to reapply for the loan every time that they wish to take out money. This provides greater flexibility and allows a business to have greater control over the:  

• amount of debt; 
• timing of debt; and 
• purpose for which the funds are used. 

Credit facilities, however, usually come with several additional fees. These can include maintenance and withdrawal fees. The terms of the credit facility will usually depend on the financial situation of the business receiving it. Furthermore, they will vary with the financial institution providing the facility. The terms will include considerations such as:

• lending amount;
• repayment terms;
• interest rates;
• legal conditions (for example, penalties in a loan default); and
• loan maturity date. 

Revolving Credit Facilities

Revolving credit facilities are a common type of credit facility. This allows the borrower to withdraw money on an ongoing basis as and when required. In many ways, it is similar to an overdraft. You and the financial institution issuing the facility will agree on a credit limit, and you can take out and use money up to that limit. You are liable for interest payments on outstanding amounts in this loan structure. 

The credit limit given to a company is usually determined by its credit history. This is usually the equivalent of one month’s revenue for that particular business. Many small and medium-sized businesses use revolving credit facilities for working capital to avoid cash flow issues. 

Term Loans

Term loans are distinct from revolving credit facilities in one major way. That is, the borrower usually pays them back (with interest) in accordance with a fixed repayment schedule. A term loan is lent for a specific amount of time, whereas revolving credit facilities provide long-term access to funds. 

These loans typically come with a fixed or variable interest rate and a maturity date and are usually used to complete a one-off payment, such as an asset purchase. 

Revolving facilities, on the other hand, are used for a variety of things such as: 

• business operations;
• share repurchases;
• business acquisitions; or
• corporate expenses.

Should I Use a Credit Facility?

Credit facilities, as mentioned, allow you to flexibly access funds. You might prefer one over a traditional loan, as the latter can be more rigid in its repayment terms. These facilities are especially useful for small and medium-sized businesses, but companies of all sizes can use them. This is because they help avoid potential cash flow problems when embarking on new ventures.

At the same time, however, securing a credit facility can be time-consuming and expensive. Sometimes, a lender may ask a business owner for a personal guarantee. A personal guarantee means that the party to the guarantee is liable to pay back the loan if the business is unable to. In addition, credit facilities often have high interest rates than traditional loans and are not sustainable as long-term financing options. 

Instead, they best cover immediate costs when you do not want to disrupt your cash flow. 

Key Takeaways

As a business, you may wish to consider acquiring a credit facility to access greater funds. A credit facility agreement provides the borrower with access to funds in a more flexible way than a traditional loan. Traditional loans, however, tend to have lower interest rates and may be easier to procure. Generally, you can use credit facilities to finance various things, such as working capital, business acquisitions, and share repurchases. Revolving credit facilities are a common type of credit facility and allow the borrower to withdraw and pay back the money on a more ad hoc basis. In many ways, these credit agreements operate like an overdraft. On the whole, whether it is worth getting a credit facility depends on the size of your business and what your business will use it to fund. Generally, it is useful to have the option of a credit facility available to you.

If you have any questions about credit facilities, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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