Facility: Definition, Loan Types, and Examples
Key takeaways
– A facility is a formal lending arrangement from a bank or financial institution that provides a company with access to capital.
– Common facility types include overdraft services, lines of credit, revolving credit, term loans, and letters of credit.
– Facilities can be short- or long-term and may be secured or unsecured, depending on the agreement and lender requirements.
What is a facility?
A facility is a structured financial assistance program that lets a business borrow money under agreed terms. It can take many forms—short-term liquidity support, ongoing credit access, or project financing—and is commonly used to fund operations, manage cash flow, or finance investments.
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Purpose of a facility
Facilities provide businesses with flexible funding to cover timing gaps, seasonal downturns, unexpected expenses, or planned investments. They help companies avoid layoffs or operational disruption when revenue fluctuates. Repayment schedules and interest vary by facility type; some are repaid monthly or quarterly, others over years.
Examples and types of facilities
Facilities are offered in many forms to match different needs:
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- Overdraft services
- Short-term borrowing that covers negative balances in a cash account.
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Typically quick, with interest and fees; often no early-payoff penalties.
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Business lines of credit (LOC)
- Unsecured or secured access to cash up to a set limit.
- Draw and repay as needed; interest is paid on amounts used.
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Can be traditional (annual review, may be callable) or non-traditional (faster access, higher limits).
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Revolving credit
- Similar to an LOC but designed for ongoing working-capital needs.
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Has a credit limit, no fixed monthly payment, and interest accrues on outstanding balances.
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Term loans
- Lump-sum commercial loans with fixed terms and interest rates.
- Used for large purchases or acquisitions.
- Intermediate-term loans: typically up to 3 years, repaid monthly (may include balloon payments).
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Long-term loans: can extend up to 20 years and are often secured by collateral.
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Letters of credit
- Used in domestic and international trade to guarantee payment between buyer and seller.
- The issuing financial institution assures payment if contract conditions are met.
Committed vs. uncommitted facilities
Facilities can be committed (the lender is contractually obliged to provide funds up to a limit) or uncommitted (the lender may choose whether to advance funds). The commitment level affects certainty of access and pricing.
How to qualify for a business line of credit
Lenders typically evaluate:
– Business credit score and financial history
– Consistent positive revenue over a period
– A clear business plan and financial projections
– Owner investment or equity in the business
– Industry experience and management track record
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Intermediate-term vs. long-term loans
– Intermediate-term loans: generally up to 3 years, regular monthly repayments, used for medium-term needs.
– Long-term loans: may extend up to 20 years, often secured by collateral, and used for major capital projects such as real estate developments.
Example
A seasonal retailer with low revenue in a slow month can use a short-term facility (for example, a line of credit) to cover payroll and inventory until sales recover, then repay the borrowed amount as cash flow improves.
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Bottom line
Facilities are flexible lending arrangements that help businesses manage cash flow, finance growth, and support operations. Choosing the right type—overdraft, LOC, revolving credit, term loan, or letter of credit—depends on the company’s purpose, repayment capacity, and whether collateral or a committed line is required.