Last updated on June 4th, 2021 at 11:02 am
Credit facilities are a variation of loan that is mostly used in the business and corporate world. Basically, a credit facility allows a business to borrow money (called loan) over a long period instead of coming back for a fresh loan when it needs another cash inflow.
Credit facilities are the alternative ways to get corporate loans, as it helps companies achieve their goals much faster and saving them the stress of reapplication.
Putting it in context, we can describe credit facilities as an umbrella loan, giving access to corporate organizations to draw out more money than it has, to meet its needs.
This way, the company does not have to directly apply for a loan, saving time and rigours. Eventually, the company would be required to repay the loan, along with interest only on the extra amount withdrawn. All parties would have agreed on an interest rate beforehand.
The interest rate applied to a credit facility depends on one major important factor, which is the borrower’s credit score or rating. The better your credit score, the lesser your interest rate would be since they believe you have a good financial history.
On the flip side, a poor rating would certainly attract a high-interest rate, indirectly ensuring that you pay back your loan in time.
Short term credit facilities are designed to only last for a while, and can be further divided into the following:
They design long-term credit facilities to appeal to corporations looking at obtaining long-term loans. The different types include:
Other types of long-term credit facilities are Securitization and bridge loans.
Credit facilities are important for our everyday business life, as well as the survival and expansion of corporations. Also, most of these credit facilities are practised today, and as long as you have a good credit score, you can easily access one.