What Is a Facility?
Let me explain what a facility means in this context. It's a formal financial assistance program from a lending institution designed to help a company that needs operating capital. You'll find types like overdraft services, deferred payment plans, lines of credit, revolving credit, term loans, letters of credit, and swingline loans. Essentially, when I say facility, I'm talking about another term for a loan that a company takes out.
Key Takeaways
Facilities come from banks and lending institutions to support companies. The primary types are overdraft services, business lines of credit, term loans, and letters of credit. At its core, a facility is just another name for a company loan aimed at supporting operations.
What Is the Purpose of a Facility?
A facility sets up an agreement between your company and a lender, public or private, letting you borrow a specific amount for various purposes over a short time. This loan has a fixed amount and doesn't need collateral. You, as the borrower, make monthly or quarterly payments with interest until it's all paid off.
This is crucial for companies looking to avoid layoffs, slow growth, or shutdowns during seasonal dips in revenue. Take a jewelry store that's short on cash in December with low sales; the owner requests a $2 million facility from a bank, pays it back by July as business improves. You use the funds to keep operating and repay in monthly installments by the due date.
Fast Fact
A facility can help your company get through seasonal sales cycles when revenue drops low.
Examples of Facilities
You have several options for short-term borrowing based on your business needs, and these can be committed or uncommitted.
Overdraft services kick in when your company's cash account runs empty, providing a loan with interest and fees from the lender. These are cheaper than standard loans, process quickly, and have no penalties for early payoff.
Business lines of credit, or LOC, give you unsecured access to cash when needed at competitive rates with flexible payments. A traditional one includes check-writing, annual reviews, and possible early calls by the lender. Non-traditional versions offer quick cash access and high limits.
Revolving credit comes with a set limit but no fixed monthly payments, though interest accrues and capitalizes. If your company has low cash and needs to fund working capital, this provides funds anytime you require capital.
Term loans are commercial loans with fixed interest and maturity dates, often used for large investments or acquisitions. Intermediate-term ones last under three years with monthly repayments, sometimes including balloon payments. Long-term loans go up to 20 years and require collateral.
Letters of credit help domestic and international trade by having a financial institution guarantee payments and obligations between buyer and seller.
What Are the Different Types of Facilities?
Businesses can access many types, including lines of credit, term loans, letters of credit, and overdraft protection.
How Do You Qualify for a Business Line of Credit?
When you apply, banks check for a good credit score, a detailed business plan, positive revenue over a set period, personal investments in the business, and industry experience.
What Is the Difference Between Intermediate-Term Loans and Long-Term Loans?
Intermediate-term loans run up to three years with monthly payments, while long-term ones extend to 20 years backed by collateral. These are commonly for financing large real estate projects.
The Bottom Line
Banks and lenders provide a range of facilities to businesses, from lines of credit to term loans. These serve purposes like funding projects or supporting operations.
Other articles for you
Real-Time Gross Settlement (RTGS) is a system for instant, individual processing of high-value bank transactions to reduce risks.
The World Bank provides financial support and resources to developing countries to promote economic growth and reduce poverty.
A widow maker in finance refers to high-risk trades that lead to massive losses, often defying expectations, with examples in bonds and commodities.
An Employee Stock Purchase Plan (ESPP) enables employees to buy company stock at a discount through payroll deductions, offering potential financial benefits and tax advantages.
A level death benefit in life insurance provides a fixed payout that doesn't change over time, offering lower premiums but risking value erosion due to inflation.
Marginal revenue product (MRP) measures the additional revenue generated by adding one more unit of a resource in production.
Batch processing involves handling multiple transactions as a group without user interaction, ideal for tasks like payroll and end-of-day reports.
A unitholder owns units in investment trusts or MLPs, gaining rights and tax benefits from pooled investments.
The sharing economy enables peer-to-peer transactions of underused assets via online platforms, facing growth, criticisms, and alternatives like the gift economy.
This text compares the Relative Strength Index (RSI) and Stochastic Oscillator as momentum indicators used to forecast market trends and identify overbought or oversold conditions.