Swing line facility: Overview, definition, and example
What is a swing line facility?
A swing line facility is a short-term loan or credit line provided to a borrower that allows quick and flexible access to capital. It is typically a smaller, revolving line of credit used to cover short-term liquidity needs, such as working capital, payroll, or other immediate financial obligations. The swing line is often used by businesses that have a larger credit facility but need immediate funds for temporary, urgent needs.
The swing line facility is often part of a larger syndicated loan agreement and is typically a more flexible and accessible form of borrowing, with the ability to be repaid and re-borrowed multiple times within a short period (usually 30 days or less). Interest rates for swing line facilities are generally higher than those for long-term loans due to the increased flexibility and short-term nature of the facility.
Why is a swing line facility important?
A swing line facility is important because it provides businesses with a quick and convenient way to access working capital without needing to go through the process of applying for a more traditional loan. This facility is useful for covering short-term cash flow gaps or meeting urgent operational expenses.
For businesses, having access to a swing line facility allows for more financial flexibility and ensures that day-to-day operations are not disrupted by temporary liquidity issues. For lenders, offering a swing line facility can provide a way to offer fast, flexible loans while still benefiting from the larger credit facility's structure and terms.
Understanding a swing line facility through an example
Imagine a retail company, XYZ Retailers, that has a large, revolving credit facility of $5 million with its bank. However, the company faces a temporary cash flow shortfall due to a delay in customer payments. To address this, XYZ Retailers draws $500,000 from its swing line facility, which is part of its overall credit arrangement. This quick access to funds allows XYZ Retailers to cover immediate operating costs like payroll and supplier payments. Once the company receives its customer payments, it repays the swing line loan, restoring its available balance.
In another example, a manufacturing company, ABC Manufacturing, needs to purchase raw materials immediately but does not want to dip into its long-term financing. Instead, it accesses $100,000 from its swing line facility to cover the cost of the materials. The company expects to repay the facility within 30 days when it receives payment from its clients.
An example of a swing line facility clause
Here’s how a swing line facility clause might appear in a loan agreement or credit facility document:
“The Borrower shall be entitled to draw on the Swing Line Facility in an amount not exceeding $1,000,000 at any given time. The Swing Line Loan will be due within 30 days of each draw, and any amounts drawn on the Swing Line Facility will bear interest at a rate of 3% above the base rate, payable monthly. The Swing Line Facility is revolving, meaning that amounts repaid may be re-borrowed, subject to the terms outlined in this Agreement.”
Conclusion
A swing line facility is a short-term, revolving credit line that provides businesses with quick access to working capital for urgent or temporary liquidity needs. It is particularly useful for covering cash flow gaps and ensuring smooth business operations without resorting to long-term loans.
For SMB owner-managers, having access to a swing line facility can offer greater financial flexibility, enabling the business to handle short-term challenges and ensuring that day-to-day operations are not affected by temporary cash shortages. It also provides a way to access funds quickly and repay them within a short period.
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.