A credit facility is a broad term for a financing arrangement that gives a business access to funds, usually up to a set maximum, over a period of time. It covers revolving lines of credit, term loans, letters of credit and asset-based lines.
How it works in factoring
Credit facilities share a few features:
- A maximum amount, sometimes tied to a borrowing base such as eligible receivables and inventory
- A term, after which the facility must be renewed or repaid
- Pricing, usually interest on amounts used plus fees for the commitment
- Covenants, which are financial or reporting conditions the business must meet
- Collateral and often personal guarantees
A factoring arrangement is not technically a loan, but in practice it can work much like a facility. The factor sets an overall factoring line, a maximum amount of purchased invoices outstanding at one time, and the business sells invoices into it as needed.
Businesses sometimes use factoring alongside a bank facility. That requires coordination, because the bank may already hold a lien on receivables. An intercreditor or subordination agreement can carve receivables out for the factor or set priorities.
What to check
- Whether a facility is committed (the lender must fund if conditions are met) or uncommitted
- Covenants that could be tripped by a slow quarter
- How existing facilities restrict selling receivables
- Fees for unused amounts and early termination
Knowing which kind of facility fits your cash cycle helps you choose between a bank line, asset-based lending and factoring.