Types of business finance

What are credit facilities?

Can a credit facility help your business? Your business is important – it can be the source of your livelihood, and it's an essential part of your life. But just like any relationship, it takes work to keep things running smoothly. And there are times when you need help from outside sources—like credit facilities and loans. As small businesses grow, their needs for funding change as well. Check out our guide to credit facilities to see if this option is right for you.

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What is a credit facility?

A credit facility is a way for you to get an advance on your expected future income. They are usually ongoing loans or overdrafts, and can be useful for businesses that need quick access to cash.

Businesses often use credit facilities to finance their growth, which is why businesses may ask for one when applying for loans or overdrafts.

Credit facilities are also known as debt facilities, credit lines or overdrafts.

How a credit facility works

When you sign up for a credit facility with a bank or other lender, they give you permission to borrow money from them up to a certain amount. This amount is referred to as the 'credit limit' or 'borrowing limit'. The lender will agree to pay back the money over time, usually in monthly instalments over several years (known as an instalment term). Your repayments will be calculated according to the interest rate on your loan plus any fees charged by the provider.

The most common type of credit facility is a line of credit. With a line of credit, you can borrow up to a certain amount at any time during the life of the loan. For example, if you have a $10,000 line of credit with 10% interest rate and no monthly repayments, you could withdraw $1000 per month for 10 years (120 months). The interest rate would be calculated on the balance outstanding each month.

Another type of credit facility is an overdraft account. With an overdraft account, you can only withdraw money whenever there is enough money in your account to cover it.

What is a revolving credit facility?

Credit facilities are a type of financing that allows businesses to borrow money from lenders. These types of loans make up a large portion of what's known as revolving credit. When you apply for a line of credit with your bank or other financial institution, they will typically approve you based on several factors: your business' profitability; how long it's been in operation; its overall financial stability and prospects for growth; and whether it has any existing loans with them (which can increase both their confidence level about issuing capital).

A revolving credit facility is a loan that allows you to borrow funds in different ways, at different times, and for different amounts. For example, if the bank has given you a $1 million line of credit, they will allow you to draw on it as required: You might use $100,000 one month and $300,000 the next.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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