Credit facility

A credit facility or line of credit is a common form of borrowing used by businesses and is normally renewable annually.

The flexibility of credit facilities means firms can borrow as much as they need at any time, provided they stay within the set credit limit. It works like a current account, except that the drawdowns mean the account will usually have a debit balance.

Interest is paid on the amount drawn down.

The amount borrowed must be repaid at maturity, unless the credit facility is rolled over.

Early repayments are allowed, increasing the available limit.

Tacit renewal of the credit facility with the same term and general conditions is usually agreed and is effective immediately. Specific conditions such as interest rate, fees or expenses, must be negotiated every time the credit facility is renewed.

The borrower may ask for the facility to be renewed on maturity even if it is not envisaged in the contract. However, new conditions will have to be negotiated, and the bank is not obliged to agree to a renewal.

 

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