Facility Agreement Vs Credit Agreement

Facility Agreement vs Credit Agreement: What`s the Difference?

When businesses need to secure financing, they often turn to facility agreements and credit agreements. Both of these agreements can provide funds for working capital, capital expenditures, and debt refinancing. However, they serve different purposes and have distinct features. In this article, we`ll break down the key differences between facility agreements and credit agreements.

What is a Facility Agreement?

A facility agreement is a legal document that outlines the terms and conditions of a loan or credit line provided by a lender to a borrower. This agreement is usually used to provide short-term financing for specific purposes, such as funding a project, buying inventory, or covering day-to-day operating expenses.

The lender provides the borrower with access to a specified amount of money, called the facility limit, which the borrower can draw upon on an as-needed basis. The borrower is only charged interest on the amount of money they actually use, not the entire facility limit.

Facility agreements are usually secured by assets, such as inventory, accounts receivable, or property. This means that if the borrower defaults on the loan, the lender can seize and sell the underlying assets to recover their investment.

What is a Credit Agreement?

A credit agreement is a legal document that outlines the terms and conditions of a loan or credit line provided by a lender to a borrower. This agreement is usually used to provide long-term financing for general purposes, such as funding growth, expanding operations, or acquiring new assets.

The lender provides the borrower with access to a specified amount of money, called the credit limit, which the borrower can draw upon on an as-needed basis. The borrower is charged interest on the entire credit limit, even if they don`t use it all.

Credit agreements are usually unsecured, which means they aren`t backed by specific assets. Instead, they are based on the borrower`s creditworthiness and ability to repay the loan. If the borrower defaults on the loan, the lender can take legal action to recover their investment, but they don`t have the right to seize and sell specific assets.

Key Differences Between Facility Agreements and Credit Agreements

Here are the key differences between facility agreements and credit agreements:

1. Purpose: Facility agreements are usually used for short-term financing, while credit agreements are used for long-term financing.

2. Terms: Facility agreements have specific terms and conditions for each drawdown, while credit agreements have a single set of terms and conditions for the entire credit limit.

3. Interest: Facility agreements charge interest on the amount drawn down, while credit agreements charge interest on the entire credit limit.

4. Security: Facility agreements are usually secured by specific assets, while credit agreements are unsecured.

5. Risk: Facility agreements are less risky for lenders because they are secured by assets, while credit agreements are riskier because they are unsecured.

Conclusion

Facility agreements and credit agreements are both useful tools for businesses that need financing. However, they have different purposes, terms, and conditions. Facility agreements are usually used for short-term financing, while credit agreements are used for long-term financing. Facility agreements charge interest on the amount used, while credit agreements charge interest on the entire credit limit. Facility agreements are secured by specific assets, while credit agreements are unsecured. By understanding the key differences between these two types of financing agreements, businesses can make informed decisions about which type of financing is best for their needs.

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