A loan facility is a legally binding arrangement in which a lender commits to making a set amount of capital available to a borrower over a defined period, rather than handing over a single lump sum at closing. The borrower draws money as needed, pays interest only on what is actually outstanding, and in some structures can repay and re-borrow against the same commitment. That flexibility is the whole point: a business gets on-demand access to capital without renegotiating a new loan every time cash needs shift.
How a Facility Differs From a Standard Loan
With a traditional installment loan, you receive the full principal at closing and start paying interest on the entire balance immediately. A facility works differently. The lender reserves a pool of capital for you, and you decide when and how much to draw. If your commitment is $50 million and you only need $10 million this quarter, you carry interest on $10 million, not $50 million.
That distinction matters more than it sounds. A company with seasonal revenue swings or an acquisition pipeline rarely knows exactly when it will need capital. Borrowing the full amount upfront and parking most of it in a low-yield account while paying a higher rate on the whole balance is expensive. A facility converts debt from a fixed obligation into a tool you activate when the timing is right. The lender, meanwhile, earns fees for holding capital in reserve and collects interest when you actually use it.
Committed vs. Uncommitted Facilities
Not all facilities carry the same level of certainty. Whether the arrangement is committed or uncommitted determines whether the lender is actually obligated to fund your request.
In a committed facility, the lender is contractually required to advance funds as long as the borrower meets the conditions in the agreement. If those conditions are satisfied, the lender must extend credit up to the committed amount. This is the structure most businesses rely on for operational planning, because the capital is guaranteed to be there when needed.1LII / Legal Information Institute. Committed Credit Facility
An uncommitted facility gives the lender discretion. You can request funds, but the lender evaluates each drawdown on a case-by-case basis and can decline. Uncommitted lines are simpler to set up and often carry lower fees, but they aren’t something you can build a capital plan around, because there’s no guarantee the money will be available when you need it most.
Common Types of Loan Facilities
The two dominant structures in corporate lending are revolving credit facilities and term loan facilities. Many large credit agreements combine both under a single umbrella.
Revolving Credit Facility
A revolving credit facility works like a large-scale corporate credit line. You draw funds up to your committed limit, repay some or all of the balance, and the repaid amount becomes available to borrow again. This cycle can repeat throughout the facility’s life, which is why revolvers are the standard tool for managing working capital. Buying inventory before a busy season, bridging a gap in receivables, covering payroll during a slow month: these are classic revolving credit uses.
Revolvers often include sub-features. A swingline loan is a small, same-day borrowing option embedded within the larger commitment, designed for urgent short-term cash needs without the usual notice period. Letters of credit can also sit within a revolving facility as a sub-limit, where the lender guarantees payment to a third party on your behalf, and that guarantee reduces your available borrowing capacity under the main commitment.
Term Loan A
A Term Loan A is closer to what most people picture as a traditional loan. The borrower receives the funds upfront, or in defined installments, and repays them on a set amortization schedule. Maturities typically fall in the five-to-six-year range, with annual principal repayments that gradually reduce the balance. Banks are the primary lenders on these facilities. Once principal is repaid, you can’t re-borrow it.
Term Loan B
Term Loan B facilities are built for a different investor base. Rather than banks, they are primarily held by institutional investors such as collateralized loan obligations, debt funds, and insurance companies. The structure reflects that: maturities run five to seven years, amortization is minimal (often just 1% of principal per year), and the bulk of the principal comes due as a balloon payment at maturity. This back-loaded structure is standard in leveraged finance, where private equity sponsors want to minimize mandatory cash outflows during the life of the investment.
Bridge Loans and Delayed Draw Facilities
Two other facility types come up frequently in acquisition financing. A bridge loan is a short-term commitment, typically maturing in three to twenty-four months, designed to provide immediate capital while the borrower arranges permanent financing. If a company needs to close an acquisition before its bond offering is ready, a bridge fills the gap.
A delayed draw term loan works differently. Instead of receiving all funds at closing, the borrower has a window, sometimes twelve to eighteen months, during which it can draw down capital as specific needs arise. Companies pursuing a series of add-on acquisitions use these heavily, because the capital is committed and available but doesn’t start accruing interest until drawn. The borrower pays a ticking fee on the undrawn portion during the availability period to compensate the lender for keeping the funds reserved.
What a Facility Costs
The headline commitment amount is only part of the picture. The pricing has several layers.
Interest Rate Structure
Most facilities charge a floating interest rate built from two pieces: a benchmark rate plus a credit spread. The benchmark for U.S. dollar loans is the Secured Overnight Financing Rate (SOFR), which replaced the now-defunct LIBOR. SOFR measures the cost of borrowing cash overnight using U.S. Treasury securities as collateral, and it’s based on roughly $1 trillion in daily repurchase agreement transactions.2Federal Reserve Bank of New York. How SOFR Works
The credit spread, also called the margin, is the lender’s premium above SOFR and reflects the borrower’s credit risk. A strong investment-grade company might pay a spread of 100 to 150 basis points (1.0% to 1.5%) above SOFR. Leveraged borrowers routinely pay spreads north of 400 to 500 basis points. Many agreements include a pricing grid that adjusts the spread up or down as the borrower’s leverage ratio or credit rating changes.
Commitment Fees and Upfront Costs
You don’t just pay interest on what you borrow. The lender charges a commitment fee on the portion of the facility you haven’t drawn, typically 0.25% to 1.0% per year on the unused balance. This compensates the lender for reserving capital it could otherwise deploy elsewhere. On a $100 million revolver with $30 million drawn, you pay the commitment fee on the remaining $70 million.
Syndicated facilities carry additional upfront costs. The lead arranger typically earns an arrangement fee at closing, which can run from 1% to 5% of the total commitment depending on the deal’s complexity and market conditions. Administrative agent fees, legal costs on both sides, and various processing fees add to the total. These are negotiated at the term sheet stage and are usually non-refundable once the facility closes.
Covenants and What Counts as Default
Covenants are the lender’s primary tool for monitoring a borrower’s financial health and limiting risky behavior between drawdowns. They fall into two broad groups.
Maintenance covenants require the borrower to meet specific financial benchmarks every quarter, such as keeping the ratio of debt to earnings below a set threshold. Trip one and the lender can declare a default regardless of whether any payments have been missed.3Federal Reserve Bank of Boston. High-Yield Debt Covenants and Their Real Effects Negative covenants restrict specific actions. Selling major assets, taking on additional debt, paying dividends above a certain threshold, or changing the business model might all require the lender’s prior written consent.
Two financial ratios show up in nearly every facility. The leverage ratio (usually total debt divided by EBITDA) caps how much debt the company can carry relative to its earnings. The interest coverage ratio (EBIT divided by interest expense) ensures the company generates enough operating income to service its debt. A lender might require a minimum interest coverage ratio of 2.0x, meaning the company must earn at least twice its interest costs.
Most credit agreements also include a material adverse change (MAC) clause, a catch-all that lets the lender call a default if the borrower’s financial condition or business prospects deteriorate significantly, even without a specific covenant breach. Borrowers push hard during negotiations to carve out industry-wide downturns and general economic conditions from the MAC definition.
Default itself is broader than missing a payment. Credit agreements list several triggering events:
- Payment default: failing to pay principal, interest, or fees when due.
- Covenant breach: violating any maintenance or negative covenant, even if all payments are current.
- Cross-default: defaulting on another debt obligation above a specified threshold, which can pull a missed payment on a separate loan into all your facilities.
- Bankruptcy filing: filing for bankruptcy protection or having an involuntary petition filed against you.
- Material misrepresentation: a representation made in the credit agreement or during a drawdown request that turns out to be materially false.
- Material adverse change: a significant deterioration in the borrower’s condition that triggers the MAC clause.
When an event of default occurs, the lender has the right to accelerate the loan, meaning the entire outstanding balance becomes immediately due and payable. In a syndicated facility, the required lenders (usually holders of a majority of the commitments) must vote to accelerate. A borrower may have a cure period for certain technical defaults, but payment defaults and bankruptcy filings typically trigger immediate acceleration rights.
Syndicated Loan Facilities
When a borrower needs more capital than any single bank wants to commit, the facility gets syndicated. A lead arranger, usually a major investment bank, structures the deal, underwrites the full commitment, and then sells portions to a group of lenders called the syndicate. This is standard for large acquisitions, infrastructure projects, and leveraged buyouts where the total facility can run into the billions.
An administrative agent, often a separate commercial bank within the syndicate, handles the day-to-day mechanics after closing. That means processing drawdown requests, distributing interest payments to each lender based on its share, collecting financial statements, and monitoring covenant compliance on behalf of the entire group. Every lender in the syndicate shares the risk and income proportionally to its commitment.
From the borrower’s perspective, syndication is mostly invisible after closing. You deal with the administrative agent, not twenty different banks. But the syndication process itself affects pricing. If investor appetite is strong, the arranger can tighten spreads. If the market is soft, the borrower may need to sweeten terms to attract enough participants.