how credit facilities work
credit facilities are used broadly across the financial market as a way to provide funding for different purposes companies frequently implement a credit facility in conjunction with closing a round of equity financing or raising money by selling shares of their stock a key consideration for any company is how it will incorporate debt in its capital structure while considering the parameters of its equity financing the company may take out a credit facility based on collateral that may be sold or substituted without altering the terms of the original contract the facility may apply to different projects or departments in the business and be distributed at the company s discretion the period for repaying the loan is flexible and like other loans depends on the credit situation of the business and how well it has paid off debts in the past 1the summary of a facility includes a brief discussion of the facility s origin the purpose of the loan and how funds are distributed specific precedents on which the facility rests are included as well for example statements of collateral for secured loans or particular borrower responsibilities may be discussed a credit facility isn t debt a credit facility gives the holder the right to demand loan funds in the future and the borrower is only indebted when they draw on the credit facility 1credit facility detailsa credit facility agreement details the borrower s responsibilities loan warranties lending amounts interest rates loan duration default penalties and repayment terms and conditions the contract opens with the basic contact information for each of the parties involved followed by a summary and definition of the credit facility itself the terms of interest payments repayments and loan maturity are detailed they include the interest rates and date for repayment if a term loan or the minimum payment amount and recurring payment dates if a revolving loan the agreement details whether interest rates may change and specifies the date on which the loan matures if applicable the credit facility agreement addresses the legalities that may arise under specific loan conditions such as a company defaulting on a loan payment or requesting a cancellation the section details penalties the borrower faces in the event of a default and steps the borrower takes to remedy the default a choice of law clause itemizes particular laws or jurisdictions consulted in case of future contract disputes types of credit facilitiescredit facilities come in a variety of forms some of the most common include a retail credit facility is a method of financing essentially a type of loan or line of credit used by retailers and real estate companies credit cards are a form of retail credit facility 2a revolving loan facility is a type of loan issued by a financial institution that gives the borrower the flexibility to draw down or withdraw repay and withdraw again 3 essentially it s a line of credit with a variable fluctuating interest rate a committed facility is a source for short or long term financing agreements in which the creditor is committed to providing a loan to a company given the company meets specific requirements set forth by the lending institution the funds are provided up to a maximum limit for a specified period and at an agreed interest rate term loans are a typical type of committed facility 4a credit facility can either be classified as short term or long term short term credit facilities often use inventory or operating receivables as collateral and have more favorable loan terms due to their short term nature long term credit facilities are more costly to compensate for risk although they offer a company the greatest flexibility pros and cons of credit facilitiescredit facilities or other lines of credit offer tremendous flexibility for companies that aren t sure what their future credit needs will be however securing this type of line of credit may be difficult and expensive here are the advantages and disadvantages to a credit facility provides a company financial flexibilitystrengthens the relationship between a financial institution and a companyoften increases the credit rating of a companymay require less administrative burden to secure future debtoften results in added maintenance and withdrawal feesmay be difficult for younger or riskier companies to secureoften requires a burdensome process to securemay require additional administrative burden to maintain loan covenantsthough credit facilities are generally not used to support day to day operations and ensure a company s survival a credit facility gives a company more resources to thrive operationally saving operating cash flow for strategic expansion allows the company to grow while credit facility cash flow can be used for one time or emergencies a credit facility also bolsters a company s ability to remain solvent should its business be cyclical or seasonal credit facility examplein 2019 tradeweb markets collaborated with financial institutions to secure a 500 million revolving credit facility proceeds from the facility were intended to be used for general corporate purposes and the lead legal arranger for the facility was cahill gordon reindel llp 5 as of dec 31 2022 tradeweb markets had drawn down 500 million with remaining availability of 499 5 million 6due to the significant size of this credit facility the indebtedness is with a syndicate of banks with the lead administrative agent being citibank n a 7 the credit agreement imposes a maximum total net leverage ratio and minimum cash interest coverage ratio requirement subject to satisfaction of certain conditions tradeweb markets can increase the credit facility by an additional 250 million with consent from all syndicate lenders 6in the example tradeweb markets also notes risks related to this indebtedness including 