# Facility: Definition, Loan Types, and Examples

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## What Is a Facility?

A facility is a formal financial assistance program offered by a lending institution to help a company that requires operating capital. Types of facilities include overdraft services, deferred payment plans, [lines of credit (LOC)](https://www.investopedia.com/terms/l/lineofcredit.asp), revolving credit, term loans, letters of credit, and [swingline loans](https://www.investopedia.com/terms/s/swinglineloan.asp). A facility is essentially another name for a loan taken out by a company.

### Key Takeaways

*   Facilities are financial assistance programs offered by banks and lending institutions to companies.
*   The main types of facilities are overdraft services, business lines of credit, term loans, and letters of credit.
*   A facility is essentially another name for a loan taken out by a company to support operations.

## What Is the Purpose of a Facility?

A facility is an agreement between a company and a public or private lender that allows the business to borrow a particular amount of money for different purposes for a short period of time. The loan is for a set amount and does not require [collateral](https://www.investopedia.com/terms/c/collateral.asp). The borrower often makes monthly or quarterly payments, with interest, until the debt is paid in full.

A facility is especially important for companies that want to avoid things such as laying off workers, slowing growth, or closing down during seasonal sales cycles when revenue is low.

For example, if a jewelry store is low on cash in December when sales are down, the owner can request a $2 million facility from a bank, which will be paid back in full by July as business picks up. The jeweler uses the funds to continue operations and pays back the loan in monthly installments by the agreed-upon date.

> **Fast Fact**
>
> A facility can help a company weather seasonal sales cycles when its revenue is low.

## Examples of Facilities

There are a number of facilities available for short-term borrowers, depending on the needs of the borrowing businesses. These loans can be [committed](https://www.investopedia.com/terms/c/committedfacility.asp) or [uncommitted](https://www.investopedia.com/terms/u/uncommittedfacility.asp).

### Overdraft Services

Overdraft services provide a loan to a company when the company's cash account is empty. The lender charges interest and fees on the borrowed money. Overdraft services cost less than loans, are quickly completed, and do not include penalties for an early payoff.

### Business Lines of Credit (LOC)

An unsecured business line of credit gives corporations access to cash as needed at a competitive rate, with flexible payment choices. A traditional line of credit provides check-writing privileges, requires an annual review, and can be called early by the lender. A non-traditional line of credit provides businesses with quick access to cash and a high credit limit.

[Revolving credit](https://www.investopedia.com/terms/r/revolvingcredit.asp) has a specific limit and no set monthly payments, yet interest accrues and is capitalized. Companies with low cash balances that need to fund their [net working capital](https://www.investopedia.com/terms/w/workingcapital.asp) needs will usually go for a revolving credit facility, which provides access to funds any time the business needs capital.

### Term Loans

A term loan is a [commercial loan](https://www.investopedia.com/terms/c/commercial-loan.asp) with a set interest rate and maturity date. A company typically uses the money to finance a large investment or acquisition. Intermediate-term loans are under three years and are repaid monthly, possibly with balloon payments. Long-term loans can be up to 20 years and are backed by collateral.

### Letters of Credit

Domestic and international trade companies use letters of credit to facilitate transactions and payments. A financial institution assures payment and completion of obligations between the applicant (buyer) and the beneficiary (seller).

## What Are the Different Types of Facilities?

Among the many types of facilities offered to businesses are lines of credit, term loans, letters of credit, and overdraft protection.

## How Do You Qualify for a Business Line of Credit?

When businesses apply for a line of credit, banks will often assess that they have a good credit score, a detailed business plan, positive revenue for a determined period of time, personal investments in the business, and experience in the industry.

## What Is the Difference Between Intermediate-Term Loans and Long-Term Loans?

Intermediate-term loans have terms of up to three year that are paid monthly while long-term loans have up to 20-year terms that are back by collateral. These type of loans are often used to finance large commercial projects in the real estate sector.

## The Bottom Line

Banks and lending institutions offer a wide variety of facilities to businesses, from business lines of credit to term loans. These loans can serve numerous purposes, such as financing a specific project or providing capital to support operational activities.  

> **Article Sources**
>
> 1.  Wells Fargo. "[Business Lines of Credit](https://www.wellsfargo.com/biz/business-credit/lines-of-credit/)."
>     
> 2.  International Trade Administration. "[Methods of Payment: Letter of Credit](https://www.trade.gov/letter-credit)."