Credit Facilities

Credit facilities: the backbone of any growing business

A credit facility can be defined as a type of wraparound loan that gives businesses access to more money than they have on their books so they can address all their financial needs.

The borrower has more money available over an extended period and doesn’t have to reapply for a loan each time he needs more cash. As a business owner, you have the option to demand more funds down the line, but you’re only considered indebted if you draw money on the facility. Therefore, a credit facility is not defined as a debt.

As the applicant, you usually have a strong and healthy business relationship with the lender. Your partnership with the lender enables you to negotiate favourable terms and securing future debt is easier than in the case of a loan.

Not having to apply for a loan saves you time and frustration. You’ll be expected to repay the money you’ve borrowed, together with the interest, but only on the extra money you’ve used. All parties involved in the transaction have to come to an agreement on the interest prior to establishing the facility.

Controlling your income and expenses with a credit facility 

You can use a credit facility to finance trade products and service overdrafts in your company’s current account when your client requires quick processing of transactions.

This facility enables you to better control the amounts of debt you owe as well as the timelines of these debts and the utilisation of funds.

Equity financing explained 

Credit facilities function across the financial industry as they offer business funding to be used for a wide range of applications. Most commonly, companies use a credit facility when closing on equity financing or when they raise cash through selling their shares. It’s vital to know how this form of debt will be incorporated into your bookkeeping when you define the framework of your equity financing.

You usually offer collateral to be sold or substituted in a way that does not change the terms of your original contract. Your credit facility can be accessed from the different departments in your business and used across your various projects. You distribute the money as you see fit.

A credit facility is not a loan

A business loan is a much more structured agreement between yourself and a finance provider. You have to cite specific reasons for the loan and indicate how you plan to use the money. Your interest will be determined by the level of risk. You get your money upfront and are subjected to a scheduled repayment regimen that includes interest on the borrowed amount.

Because a credit agreement allows you to acquire debt only when you need it, the process is much more flexible. It offers you more freedom to decide on the amount you wish to take and how you plan to apply it in your business. You only become indebted whenever you need additional financing.

The crux of the credit agreement

The credit facility terms defined:

• The responsibilities of the borrower
• Loan warranties
• The amount and interest rate
• Duration of the agreement
• Repayment terms and conditions

The contact details of the parties involved as well as a definition/description of the credit facility are also stipulated.

Stating your intent

A credit guarantee is a statement of intent by a third party to pay, on demand, the monies due by a consumer.

There are three main types of guarantees:

1. Financial: The guarantor accepts liability for payment if the borrower fails to repay his debt.
2. Performance: The guarantor provides a security bond to the lender that the contractor will finish the work according to the contract agreement, and within the allocated time.
3. Deferred payment: These guarantees are offered by banks to acquire machinery and products and are issued for postponed payments. 

Interest on your credit

The interest rate applicable to your facility is determined by:

• Your credit score rating: The higher your score, the less your interest rate.
• Your repayment history.
• The current economic climate.
• The value of the Rand always has a bearing on interest rates. 

The different types of credit facilities

Short term: These facilities only apply for a short while and include:

• Cash credit and overdrafts: You’re allowed to withdraw more cash than is available in your company’s deposit account. Interest is payable on this overdrawn amount.
• Short-term loans: These offer you working capital to address your most pressing business needs. The term’s approximately one year and the loan is relatively insecure.
• Trade finance: This is a short-term credit offering to support the health of your cash flow.

Some trade-finance product definitions:

1. Letters of credit: This is secured credit. The bank guarantees the supplier that he’ll receive payment. It eliminates supplier risk. 
2. Export credit: Enables export growth and is provided to exporters through government agencies.
3. Supplier’s credit: This product puts a supplier at ease and protects his relationships with his clients. It’s vital to come to an agreement with suppliers on payments as it ensures seamless transactions.
4. Factoring: Your company can sell its outstanding invoices to another company at discounted prices. This enables you to remove your receivables from your balance sheet, filling your cash requirements.
5. Bridge loans: These loans represent short-term interim use while your company awaits long-term financing. 
6. Long-term: These types of facilities are aimed at bigger businesses and corporations in need of long-term financing.

Products include:

• Bank loans: These are the most familiar credit offering and are defined by their specified repayment schedules. Banks will scrutinize your financials carefully before awarding a loan, as they have to cushion their risk.
• Notes: These facilities are unsecured and banks raise these funds from asset markets.
• Mezzanine debt: These products represent a fusion between debt and equity and are unsecured. Terms range from 5 to 7 years.
• Securitisation: This facility closely resembles factoring but only differs in the asset liquidity and the institutions involved in the transaction. 

Core differences between secured and unsecured credit 

Secured credit

• Assets are required as collateral. There’s a risk of repossession if you don’t stick to the finance agreement.
• In the case of a bond, your home is registered as a security.
• Your property’s real value is considered for a home equity loan.
• A secured credit card requires that you deposit a specific amount of money into your facility.
• A line of credit accepts a range of assets as security.
• Examples of secured credit include overdrafts, retail loans, and export finance, to name but a few.

Unsecured credit

• Your word’s enough for this type of credit. It’s accepted in good faith by your credit providers.
• A signature loan is a good example of an unsecured facility.
• Interest rates are more expensive because you don’t offer any collateral.
• Master and Visa cards fall in this category as you only pay a monthly minimum amount on your outstanding balance.
• Other examples include retail and petrol cards. 

The odd one out

A credit card is not a credit facility because it involves technology that enables automatic transactions which are split into various tracking categories and can also be conveyed to other cards. A credit card doesn’t refer back to a cardholder being able to borrow money. 

Steer clear of reckless credit 

It’s vital that all credit providers ensure that the consumer is fully aware of the costs and risks associated with the suggested credit. Your obligations to the credit agreement need to be spelled out clearly. 

A credit agreement is considered reckless if the credit provider:

• didn’t conduct a thorough assessment of your financial history.
• entered into a contract with you although the outcome of the above-mentioned assessment indicated that you didn’t fully understand the risk and cost implications involved.
• was aware that the agreement would make you over-indebted.  

The good, the bad, and the ugly

As with most things in life, there are always a number of advantages and disadvantages to consider when making sound decisions. Credit facilities are no exception. 

The good 

There are many advantages to a credit facility tailored to your business requirements.

• It gives you financial flexibility in times of need.
• It develops and fosters a strong relationship between yourself and a financial institution.
• Administration frustration is minimised when you need to secure future debt.
• It’s convenient as credit cards etc. are much safer than having cash on you.
• It enables easy recordkeeping of transactions.
• You can use your available cash for other needs.
• Buying on credit usually means better service.
• Buying on credit can make you more attractive to other lenders. 

The bad

Important factors to keep in mind:

• Credit is always more expensive.
• Securing credit can be more challenging for a startup or young company as you don’t have an extensive credit history yet.
• The application process is tiresome because you will have to undergo a very tedious inspection of your company’s financials.
• It can easily become a dangerous habit leading to overspending.
• More paperwork and administrative activities are involved
• You'll have to pay additional fees to enjoy the flexibility of a line of credit.
• Overuse can have a very detrimental effect on your credit score.
• It can reduce your company’s future buying power, as much of your funds could go towards loan repayments.
• You won’t have much control over the use or terms of your line of credit.
• Some lenders might subject you to more rigorous interest rate assessments in an effort to mitigate their risks.
• Managing your credit facility adds to your bookkeeping burdens as you have to track and maintain financial agreements in your third-party reporting.

The ugly

As long as you stick to your credit agreements and repayments, there should be no nasty uglies waiting down the road. 

The workflow status of a credit facility record 

A credit record always needs to be approved by a second bank employee based on the four-eyes principle (also known as the two-man rule).

Workflow statuses of the credit facility record include:

• The draft: This refers to a newly created facility not yet approved. In this stage, you are allowed to edit certain fields on the credit facility tab but are unable to add any other applications to it.
• Pending: The request has been sent for approval, but no updates are available.
• Approved: Your facility has been authorised. This status doesn’t allow any editing, although you can add utilisations via the utilisation tab. 

Acting in good faith 

Credit providers are tasked with a number of duties that ensure consumers’ rights are protected.

A credit provider has to:

• register as a credit provider when his book debt reaches R 500,00.
• assess the consumer’s creditworthiness.
• make sure the consumer has a copy of their agreement.
• protect the consumer’s information and keep it confidential.
• forward statements to the consumer at regular intervals, or when requested to do so.
• to advise the consumer to seek help if he defaults on payments.
• to supply details of each concluded credit agreement to the NCR or credit bureaus.
• to keep proper records of applications, agreements, and accounts. 

You are protected

The National Credit Act requires credit providers to comply in full with the terms set in the Act. Some of the consumer rights described in the Act include things such as:

• protection against unfair credit granting.
• the right to information about the credit agreement in a language the consumer understands.
• the right to choose whether to receive agreement documents in paper copy or electronically. 

Nuts and bolts of the credit industry 

The objective of business credit facilities is to enable businesses to expand and grow by saving their operating cash flow for strategic purposes. Credit facilities enable you to stay solvent and meet your business targets if you honour the terms and agreements of the product you choose.  

The number of funding products in the financial market is daunting. It’s therefore vital that you do proper research before deciding on the right credit product and lenders for your specific needs.

The future growth of your business depends on a perfect balance between your company’s debt structure, equity capital, and business risk. Make sure that you choose your credit facility wisely. Below we've included a collection of some of the leading providers of credit facilities and this collection extends beyond the big banks.