A loan facility is a legally binding arrangement in which a lender commits to making a defined pool of capital available to a borrower over a set period, letting the borrower draw funds as needed rather than taking the full amount at once. Interest accrues only on what’s actually drawn, and in some structures repaid amounts can be re-borrowed against the same commitment. For businesses with uneven cash needs, that mechanic turns debt from a lump-sum obligation into an on-demand source of capital.
How a Facility Differs From a Standard Loan
With a traditional installment loan, you get the full principal at closing and start paying interest on the entire balance immediately. A facility reverses that. The lender reserves a pool of capital, 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 costs on $10 million, not $50 million.
That distinction matters more than it sounds. A company with seasonal revenue swings or an acquisition pipeline doesn’t know exactly when it will need capital. Borrowing $50 million upfront and parking most of it in a low-yield account while paying a higher rate on the full balance is expensive. A facility converts debt into a tool you activate when the timing is right. The lender, in exchange for holding capital in reserve, earns fees on the undrawn portion and interest when you draw.
Committed vs. Uncommitted Facilities
Not every facility carries the same level of certainty, and this is one of the first things a borrower should pin down. It 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 you meet the conditions in the agreement. If you satisfy those conditions, the lender must extend credit up to the committed amount. This is the structure most businesses build operational plans around, 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 case by case and can decline. Uncommitted lines are simpler to set up and often carry lower fees, but you cannot anchor a capital expenditure plan to one, because there is no guarantee the money will be there when you need it most.
Common Types of Loan Facilities
Corporate lending is dominated by two structures: revolving credit facilities and term loan facilities. Many large credit agreements combine both under a single umbrella, with specialty structures layered on top for specific situations.
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. That cycle can repeat throughout the facility’s life, which is why revolvers are the standard tool for working capital. Buying inventory before a busy season, bridging a gap in receivables, covering payroll during a slow month: classic revolving uses.
Some revolvers include sub-features worth knowing about. A swingline loan is a small, same-day borrowing option embedded within the larger commitment, designed for urgent short-term needs without the usual notice period. Letters of credit can also sit within a revolver as a sub-limit, where the lender guarantees payment to a third party on your behalf and that guarantee reduces your available borrowing capacity.
Term Loan A
A Term Loan A is closer to what most people picture as a traditional loan. You receive funds upfront, or in defined installments, and repay 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. Once you repay principal on a term loan, you cannot re-borrow it.
Term Loan B
Term Loan B facilities are built for a different investor base. Rather than banks, these are primarily held by institutional investors like collateralized loan obligations (CLOs), debt funds, and insurance companies. The structure reflects that profile: maturities stretch to five to seven years, amortization is minimal (often just 1% of principal per year), and the bulk of the principal comes due as a single 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, often twelve to eighteen months, during which it can draw 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 Actually Costs
Pricing on a facility has more moving parts than a simple loan, and some of those parts apply whether or not you ever draw a dollar.
Interest Rate Structure
Most facilities carry a floating 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 it 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 moves 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 deploy elsewhere. On a $100 million revolver with $30 million outstanding, you’re paying 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 the Strings Attached
Covenants are the lender’s primary tool for monitoring a borrower’s financial health between drawdowns, and they fall into two categories.
Maintenance covenants require the borrower to meet specific financial benchmarks every quarter, like keeping the ratio of debt to earnings below a set threshold. Trip a maintenance covenant and the lender can declare a default regardless of whether you’ve missed any payments.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 company’s business model might all require the lender’s prior written consent. The breadth of these restrictions is one of the most heavily negotiated parts of any credit agreement, because overly tight covenants can hamstring normal operations.
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, calculated as 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.
Beyond measurable financial covenants, most credit agreements include a material adverse change (MAC) clause. This is a catch-all provision that lets the lender call a default if the borrower’s financial condition or business prospects deteriorate significantly, even if no specific covenant has been breached. MAC clauses are deliberately broad, and borrowers push during negotiations to carve out industry-wide downturns, general economic conditions, and other events beyond their control.
What Counts as a Default
Default under a facility means more than missing a payment. Credit agreements define a long list of triggers:
- Failing to pay principal, interest, or fees when due.
- Violating a financial maintenance covenant or negative covenant, even if all payments are current.
- Cross-default: defaulting on another debt obligation above a specified threshold.
- Filing for bankruptcy protection, or having an involuntary petition filed against you.
- A materially false representation in the credit agreement or in a drawdown request.
- A deterioration serious enough to trigger the material adverse change 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. Borrowers may have a cure period for certain technical defaults, but payment defaults and bankruptcy filings typically trigger immediate acceleration rights. This is where real leverage shifts to the lender, because few borrowers can repay a large facility on short notice.
Syndicated Facilities
When a borrower needs more capital than any single bank wants to commit, the facility is 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 commitment can run into the billions.
The administrative agent, often a separate commercial bank within the syndicate, handles day-to-day mechanics after closing: processing drawdown requests, distributing interest payments to each lender based on its share, collecting financial statements, and monitoring covenant compliance for the group. Every lender in the syndicate shares 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 matters, because the lead arranger’s ability to distribute the loan affects pricing. Strong investor appetite lets the arranger tighten spreads; a soft market may force the borrower to sweeten terms to attract enough participants.