Facility fee: Overview, definition, and example
What is a facility fee?
A facility fee is a charge paid by a borrower to a lender as compensation for making a credit facility (such as a loan or line of credit) available, regardless of whether the borrower fully utilizes the facility. The fee is typically calculated as a percentage of the total credit amount or the unused portion of the facility and is often charged periodically (e.g., annually) or at the initiation of the facility.
For example, in a $1 million revolving credit agreement with a 0.5% annual facility fee, the borrower would pay $5,000 annually for the lender's commitment to make the funds available.
Why is a facility fee important?
A facility fee is important because it compensates the lender for reserving capital and maintaining the infrastructure to provide the credit facility. For borrowers, especially SMBs, this fee ensures access to funds when needed, offering flexibility for cash flow management or operational needs.
Including a facility fee in financing agreements provides transparency about costs, helps lenders cover administrative and capital allocation expenses, and ensures that borrowers understand the costs of maintaining access to the credit facility.
Understanding facility fee through an example
Imagine an SMB negotiates a $2 million revolving credit line with a bank to support working capital needs. The agreement includes a facility fee of 0.25% per year on the total credit limit. Regardless of whether the SMB draws on the credit line, it must pay the bank $5,000 annually as a facility fee to maintain access to the credit line.
In another scenario, a construction company secures a term loan facility for a project. The loan agreement specifies an upfront facility fee of 1% of the total loan amount. If the loan is $3 million, the company must pay $30,000 at the start of the loan as a facility fee.
An example of a facility fee clause
Here’s how a facility fee clause might appear in a loan agreement:
“The Borrower agrees to pay the Lender a Facility Fee equal to [Insert Percentage]% per annum of the Total Credit Facility Amount, payable on the first day of each calendar quarter during the term of this Agreement. The Facility Fee shall be non-refundable and payable regardless of the extent to which the Borrower utilizes the Credit Facility.”
Conclusion
A facility fee compensates lenders for providing access to credit facilities, ensuring that borrowers have funds available when needed. For SMBs, paying a facility fee provides financial flexibility and preparedness for operational or growth needs. A well-drafted facility fee clause in financing agreements ensures transparency, clarity on costs, and accountability for both borrowers and lenders, fostering trust and smooth financial transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.