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To apply for a credit facility, self-employed individuals or small to medium business owners need to get in touch with a bank and submit a credit facility proposal or letter. All information provided in the proposal must be factual and duly filled in. Moreover, several supporting documents need to be furnished along with the proposal. Some banks also charge certain processing fees while accepting applications for a credit facility.

Typically, the following information needs to be provided along with a credit facility proposal:

– Basic information about the business
– Purpose of availing the credit facility
– Copies of the company’s financial statements and bank statements
– Collateral documents
– Legal documents including company registration information, deed of establishment, work contracts and business licenses

Once this application is submitted to the bank with all supporting documents, the bank will review the information. If the bank finds the applicant to be eligible and if all information in the application is verified to be factual, the process commences. Usually, banks assign a relationship manager to guide people through the intricacies of a credit facility.

How to write a credit facility proposal or letter?

Writing a credit facility proposal or letter is the same as writing any business proposal. While applicants can choose to write the proposal themselves, they can also choose to use premade sample forms and templates.

Typically, a sample credit facility proposal should include the following:

Date of Application:
Contact Name & Address of the Business:
Subject: Request Proposal for Credit Facility
Body of the letter: This section should include details about the company such as the industry it is operating in, the number of years it has been active and its growth or achievements over the past few years. This should be followed by the reason for applying for the credit facility.
Applicant’s Name & Contact Details:

This proposal must always be supported with valid documents as mentioned above. Also, it is always advisable to write this proposal on the official company letterhead.

These days, most banks offering a credit facility have expedited procedures in place for credit facility applications. While some banks require applicants to fill in a custom-made credit facility application form, others simply require applicants to get in touch with them. The application process differs from one bank to another.”

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What is a home credit facility?

A home credit facility is a unique type of loan wherein borrowers can combine the benefits of a regular loan with the features of a current account. In such a facility, a home credit account is created and linked to a loan account. Any amount of money deposited in the home credit account is transferred to the loan account.

This enables borrowers to pay lower interest on the loan amount. Moreover, the money is always available to the borrower in the form of an overdraft line. Home credit facilities are quite popular with self-employed individuals and small businesses as it offers ready availability of funds at lower interest rates.

What is a standby credit facility?

A standby credit facility refers to a sum of money that can be borrowed in part or full as part of a credit facility. This sum of money must not exceed a predetermined amount and borrowers can access this money as and when needed.

Standby credit facilities are very popular with businesses as it allows them to guarantee their ability to pay clients. In such a case, a standby credit facility works exactly in the same manner as a performance bond. It can also be used as a backup source for funds in case the primary funding source fails.

Credit facility term sheet template

A credit facility term sheet template is a template which is used to detail the terms and conditions associated with a credit facility. This template also serves as the basis to developing detailed legal documents related to commercial loans.

A credit facility term sheet template usually includes information about the borrower, the amount to be borrowed, the purpose of borrowing the money, the interest rate, the facility fee, collateral, maturity details, payment details, covenants, guarantor information and reporting requirements.

Credit facility press release

A credit facility press release is an official statement announcing new credit facilities that are issued by a bank or lender. This official statement is released to the public via different types of news channels. Such a press release includes detailed information about the new credit facility, its terms and conditions and who can avail such a facility. This press release essentially seeks to notify consumers about the new options that they have when it comes to availing a credit facility.

Credit facility example

A credit facility is a special type of commercial loan that is handed out to small businesses and self-employed individuals. There are a number of different types of credit facilities, examples of which include term loans, revolving credit, letters of credit, retail credit accounts and committed facilities, among many others.

Such credit facilities can be used by a business for covering short term expenses in the event of a lack of capital. Credit facilities are offered by banks to borrowers, provided that the borrower satisfies certain eligibility criteria.

https://www.investopedia.com/terms/c/creditfacility.asp

The seniority of a credit facility mainly dictates its importance in the hierarchy of loans that a company is responsible for. A senior credit facility is secured (i.e. there is company collateral insuring the loan in the eyes of the lender). Legally speaking in the event of company collapse, a senior secured loan will be paid off through the sale of the collateral asset(s) before other more junior loans can claim assets.

Furthermore, if the company is still functional but has defaulted on a loan from a senior facility, the lender can enforce the sale of the asset to make repayments. Although rare, it is also possible during a company’s liquidation for new lenders to fund the ongoing operations of that company and actually enforce a so called ‘super-seniority’ status over assets. This super-seniority can displace the seniority of existing senior credit facilities.

Senior Facility Terms

As one might imagine, for a contract to give the lender power over the sale of collateral assets, the lender must be sure that no other lenders have interests in those assets (usually known as a first lien). Misleading lenders over the control of assets would be deemed financial crime.

With corporate senior loans, the ‘assets’ that go towards securing the loan usually aren’t physical; they mostly take the form of securities or bonds giving sole control over certain financial assets. In some cases, lenders won’t even lend against otherwise available assets if the company has any other senior credit facilities at all.

Sometimes, the strict terms surrounding senior facilities dictate that portions of profits and effective capital gains for the company must be first dedicated to paying off minimum amounts of the secured loan before they can be used elsewhere in the business.

Advantages

Despite the strict terms usually employed by senior credit facilities, resulting in senior debt, they can be very beneficial for asset rich companies with limited credit histories or for companies who are looking to negotiate very specific terms between themselves and the lender.

The private nature of the negotiations facilitates this. Similarly, the secured nature of this loan type often means that companies can borrow much larger sums of money or indeed borrow with much more forgiving rates, as the financial institution views the loan as low risk.

In the sense of the repayment commitment hierarchy that a company has in place, senior facilities can actually encapsulate other subcategories of credit facility.

For example, revolving credit facilities are often also senior credit facilities. In fact more than one subcategory of facility can be part of a larger senior facility. For example, global manufacturing giant Tenneco Inc. has a senior credit facility that amalgamates a $1.6bn revolving credit facility and a $400m term loan A facility.

The fact that a senior credit facility can exist giving beneficial rates and volumes but also be comprised of a revolving facility giving the company great flexibility demonstrates that the strict terms of the senior loan facility don’t dictate that they can’t be very powerful agreements for both financial institution and loanee.

Sometimes companies require a line of credit that does not have a definite pay-off date. Revolving credit is most commonly associated with a company’s current cash flow and change on a regular basis. A revolving credit facility is useful for unpredictable peaks and troughs in requirements and usually allows borrowing and repayment on a very flexible basis, rarely if ever employing early repayment fees.

Flexible Contract

Of all credit facilities, revolving credit usually offers the most relaxed loan conditions. Often this means that the actualized limit of the facility will be significantly lower than other subcategories of credit facility but revolving credit’s usages are such that this is rarely a drawback.

The contract of a revolving credit facility is an agreement that the financial institution will lend sums to the company that are not predefined and with little or no notice period for the duration of the facility. Such contracts routinely relieve companies of early repayment fees that they may be liable for with other types of facility. The company will however often agree to make one upfront or indeed regular commitment payments to the bank.

Usages

A common example of a company suddenly drawing down funds from a revolving credit facility is in response to an unforeseen lull in cash flow. Perhaps payroll must be satisfied or stock needs to be purchased and the company does not currently have the funds to do so, for example because of a delayed payment from a client or customer; drawing the funds from their revolving credit facility, the company will be able to pay its staff or pay for the goods and then repay the loan a short time in the future when the issue at hand has been resolved – all without suffering the negotiation of a new loan agreement and/or early repayment fees.

Interest Payments

The interest rates and payments for a revolving credit facility depend largely on whether or not the facility is secured or unsecured. If the facility is secured (i.e. collateral provided by a company asset), usually lower fees and rates will be agreed whereas an unsecured facility is considered higher risk and likely to attract higher rates/larger upfront commitment payments.

As with any facility agreement, the relationship the company has with the financial institution along with its financial history will greatly affect the terms. Usually, regular interest payments are required to be paid by the company, which of course relate to the outstanding loan amount at any given time. The dates of the payments for revolving credit facilities are usually highly flexible however and may well change during the facility’s lifetime.

As a rule, revolving credit facilities are safety nets for businesses. They are designed to be used when a company has cash flow problems rather than as a regular or semi-permanent solution. Lenders like to see revolving credit facilities paid off regularly and being used responsibly as the buffers they are intended to be. The management of these facilities is a great responsibility, as they are rarely monitored by the lender and so tend to be overseen by a person of high authority, such as a chief financial officer.

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