Incremental facility: Overview, definition, and example
What is an incremental facility?
An incremental facility is a financial arrangement where a borrower is given the option to borrow additional funds on top of an existing credit facility, often under the same terms and conditions. This type of facility allows a borrower to access extra funds when needed, without having to renegotiate the entire loan or credit agreement. Typically, incremental facilities are used in revolving credit lines or term loans to provide flexibility in case of unexpected capital requirements.
For example, a company may have an existing line of credit of $5 million but negotiate an incremental facility allowing them to borrow an additional $2 million if the need arises, up to a total of $7 million.
Why is an incremental facility important?
An incremental facility is important because it provides businesses with flexibility and access to additional capital without the need to go through a lengthy loan approval process every time they require more funds. It allows borrowers to take advantage of favorable financing terms for their current borrowing needs while having the option to secure additional funds quickly when necessary. For lenders, offering an incremental facility can make their credit products more attractive to borrowers who want flexibility in managing their financial needs.
For businesses, having access to an incremental facility can be crucial for managing cash flow, funding new investments, or responding to unforeseen expenses without the delays and complications of applying for a new loan.
Understanding incremental facility through an example
Imagine a company has a $10 million revolving credit facility with a bank, and as part of the agreement, the company negotiates an incremental facility option that allows them to borrow up to an additional $5 million if necessary. Six months later, the company experiences a sudden business opportunity and needs an additional $3 million to fund an acquisition. Using the incremental facility, the company can quickly access the extra $3 million, bringing the total available credit to $13 million.
In another example, a startup has a $2 million line of credit and negotiates an incremental facility to borrow up to an additional $1 million as needed. When the startup’s sales exceed projections and it needs more funds for inventory, it can tap into the incremental facility to increase its borrowing capacity without applying for a new loan.
An example of an incremental facility clause
Here’s how a clause like this might appear in a loan or credit agreement:
“The Borrower is granted an incremental facility of up to $[X] million, which may be drawn upon at any time, subject to the terms and conditions of the existing credit facility and the approval of the Lender. The incremental facility shall be available for a period of [Y] years from the effective date of this agreement.”
Conclusion
An incremental facility is a flexible financial tool that allows borrowers to access additional funds on top of their existing credit facilities without needing to renegotiate the terms of their loans. This arrangement is valuable for businesses that require quick access to capital to manage cash flow, fund new opportunities, or address unforeseen expenses. For both lenders and borrowers, an incremental facility provides a practical solution that supports financial flexibility and growth.
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.