What Is a Facility?
A facility is a formal financial assistance program offered by a lending institution to help a company that requires operating capital. Types of facilities include overdraft services, deferred payment plans, lines of credit (LOC), revolving credit, term loans, letters of credit, and swingline loans. A facility is essentially another name for a loan taken out by a company.
Key Takeaways
- Facilities are financial assistance programs offered by banks and lending institutions to help companies.
- The main types of facilities are overdraft services, business lines of credit, term loans, and letters of credit.
- A facility is essentially another name for a loan taken out by a company.
How a Facility Works
A facility is an agreement between a company and a public or private lender that allows the business to borrow a particular amount of money for different purposes for a short period of time. The loan is for a set amount and does not require collateral. The borrower often makes monthly or quarterly payments, with interest, until the debt is paid in full.
A facility is especially important for companies that want to avoid things such as laying off workers, slowing growth, or closing down during seasonal sales cycles when revenue is low.
For example, if a jewelry store is low on cash in December when sales are down, the owner can request a $2 million facility from a bank, which will be paid back in full by July as business picks up. The jeweler uses the funds to continue operations and pays back the loan in monthly installments by the agreed-upon date.
Examples of Facilities
There are a number of facilities available for short-term borrowers, depending on the needs of the borrowing businesses. These loans can be committed or uncommitted.
Overdraft Services
Overdraft services provide a loan to a company when the company's cash account is empty. The lender charges interest and fees on the borrowed money. Overdraft services cost less than loans, are quickly completed,and do not include penalties for an early payoff.
Business Lines of Credit (LOC)
An unsecured business line of credit gives corporations access to cash as needed at a competitive rate, with flexible payment choices. A traditional line of credit provides check-writing privileges, requires an annual review, and can be called early by the lender. A non-traditional line of credit provides businesses with quick access to cash and a high credit limit.
Revolving credit has a specific limit and no set monthly payments, yet interest accrues and is capitalized. Companies with low cash balances that need to fund their net working capital needs will usually go for a revolving credit facility, which provides access to funds any time the business needs capital.
Term Loans
A term loan is a commercial loan with a set interest rate and maturity date. A company typically uses the money to finance a largeinvestment or acquisition. Intermediate-term loans are under three years and are repaid monthly, possibly with balloon payments. Long-term loans can be up to 20 years and are backed by collateral.
Letters of Credit
Domestic and international trade companies use letters of credit to facilitate transactions and payments. A financial institution assures payment and completion of obligations between the applicant (buyer)and the beneficiary (seller).
FAQs
Key Takeaways
Facilities are financial assistance programs offered by banks and lending institutions to help companies. The main types of facilities are overdraft services, business lines of credit, term loans, and letters of credit. A facility is essentially another name for a loan taken out by a company.
What is a facility type? ›
Facility Type means any of the variable commercial rate loan, interest capitalised variable commercial rate loan, fixed commercial rate loan or interest prepaid commercial rate loan as stipulated in the Schedule and varied from time to time in accordance with this facility agreement.
What are the three types of loans give an example of each? ›
What are the different types of loans?
| Loan type | Purpose | Loan length |
|---|
| Personal loan | A wide range of personal expenses, from home improvement to vacations | 12 to 84 months |
| Debt consolidation loan | Combining debts from various sources into one loan | 12 to 84 months |
| Mortgage | To purchase a home | Typically 10 to 30 years |
6 more rowsA loan is a sum of money that an individual or company borrows from a lender. It can be classified into three main categories, namely, unsecured and secured, conventional, and open-end and closed-end loans.
What is facility term loan? ›
A credit facility that allows the borrower to borrow a lump sum for a set period with an agreed schedule for repayment. In some transactions, the term loan commitment is structured to allow the borrower to draw the full amount of the term loan facility in multiple borrowings at different times.
What is difference between loan agreement and facility? ›
The agreement sets out the terms and conditions of the agreement. It's often simply called a loan, credit facility agreement, or facility letter. A facility agreement is a short-term loan for a specific amount that does not require collateral. Instead, the borrower pays interest and repays the loan over time.
What is considered a facility? ›
The term "facility" is defined in 40 CFR 98.6 "as any physical property, plant, building, structure, source, or stationary equipment located on one or more contiguous or adjacent properties in actual physical contact or separated solely by a public roadway or other public right-of-way and under common ownership or ...
What is facility vs non facility? ›
In general, Facility services are provided within a hospital, ambulatory surgery center, or skilled nursing facility. Non Facility services are provided everywhere else and include outpatient clinics, urgent care centers, home services, etc.
Which type of loan is the cheapest? ›
Generally, secured loans tend to have lower interest rates compared to unsecured loans because they are backed by collateral. However, if you do not want to pledge any of your assets as collateral to the lender, then unsecured loans like personal loan is the best financing option.
Which type of loan is best? ›
Secured loans are typically a more affordable choice as they are backed by collateral and have lower interest rates than unsecured loans.
The most common types of secured loans are auto loans and mortgages. You'll typically borrow the appraised value of the home or car minus any down payment you make on it. If you default on your loan, the car or home can be taken away. Unsecured loans are personal loans not backed by any collateral.
How do you know what type of loan? ›
If you don't know what loans you have, check your credit report. You can get one free credit report every year. Request your free credit report. One sign that a loan is private is if you have a co-signer.
What kind of loan has the lowest interest rate? ›
In general, a secured loan, like a mortgage, will have a lower interest rate than an unsecured loan, like a standard personal loan, because it is less risky for the lender.
How many types of loan payments are there? ›
There are generally two types of loan repayment schedules - even principal payments and even total payments.
What is a loan on loan facility? ›
Most recently, there are various examples on deals we have acted on, of specific loan on loan financings, where a lender, often, but not always an investment bank, will provide back-to-back financing to another lender to provide that lender with the finances it needs to make available loans to the ultimate borrower.
What is the difference between a loan and a credit facility? ›
Loans and credits are different finance mechanisms.
While a loan provides all the money requested in one go at the time it is issued, in the case of a credit, the bank provides the customer with an amount of money, which can be used as required, using the entire amount borrowed, part of it or none at all.
What is the meaning of loan facility amount? ›
Facility Amount means the sum of the Aggregate Revolving Commitments and the Aggregate Term Loan Amount, as adjusted from time to time pursuant to the terms and conditions of this Agreement.
What is the facility limit? ›
The facility limit refers to the total amount of debt the bank is willing to lend under a given facility. It is expressed as a dollar amount, and is related to the value of the underlying assets (the Fund Property).
