Credit Facilities for Growing Companies: A CFO Guide
Understanding your borrowing options and how to use them effectively.
Key Takeaways
- •Credit facilities provide flexibility—secure them before you need them
- •Match facility type to use: revolvers for working capital, term loans for assets
- •Covenants matter as much as rates—understand what you're agreeing to
- •Relationship banking still matters, even in a digital world
Credit facilities are essential tools for managing cash flow in growing companies. The best time to secure credit is when you don't urgently need it—which means understanding your options and maintaining banking relationships before cash gets tight.
This guide covers the main types of credit facilities, how to structure them, and what to watch out for in negotiations.
Types of Credit Facilities
Revolving Credit Line
How It Works
A revolving credit line gives you access to borrow up to a limit, repay, and borrow again. Think of it like a business credit card but with better rates.
Best for: Working capital fluctuations, seasonal needs, bridge financing
Typical size: $500K - $25M for middle-market companies
Rate: Prime + 0.5% to Prime + 3%, depending on credit quality
Fees: Unused commitment fee (0.25-0.50%), annual fee
Term Loan
How It Works
A term loan provides a lump sum upfront with scheduled principal and interest payments over a defined period.
Best for: Equipment purchases, acquisitions, real estate
Typical term: 3-7 years, matched to asset life
Rate: Fixed or floating, typically slightly higher than revolvers
Amortization: Monthly or quarterly principal payments
Asset-Based Lending (ABL)
How It Works
ABL facilities are secured by specific assets—typically accounts receivable and inventory. Borrowing capacity is based on asset values, not just cash flow.
Best for: Companies with strong assets but variable cash flow
Advance rates: 80-85% on AR, 50-65% on inventory
Rate: Higher than cash flow revolvers (Prime + 2-4%)
Monitoring: Monthly or weekly borrowing base certificates
Cash Flow vs. Asset-Based
Cash flow loans are underwritten based on EBITDA and debt service coverage. ABL is underwritten based on collateral values. If your cash flow is strong and consistent, cash flow facilities are cheaper. If assets are strong but cash flow is lumpy, ABL may be more available.
Understanding Covenants
Covenants are restrictions in loan agreements that protect the lender. Violating covenants can trigger defaults, accelerate repayment, or increase rates.
Financial Covenants
- Debt/EBITDA ratio: Maximum leverage allowed
- Fixed charge coverage: EBITDA / (interest + principal + rent)
- Minimum EBITDA: Floor on profitability
- Minimum liquidity: Cash + availability floor
Negative Covenants
- Restrictions on additional debt
- Limitations on dividends/distributions
- Restrictions on asset sales
- Change of control provisions
Covenant Headroom Matters
If your covenant allows 3.5x Debt/EBITDA and you're at 3.4x, you have almost no room for a bad quarter. Negotiate covenants with realistic headroom—at least 20-25% cushion under normal conditions.
Negotiation Considerations
Credit terms are more negotiable than many companies realize. Here's what to focus on.
Key Negotiation Points
- Interest rate: Shop multiple banks; spreads vary significantly
- Covenant levels: Push for realistic cushion, not just what you can clear today
- Covenant definitions: How is EBITDA calculated? What adjustments are allowed?
- Cure rights: Can you contribute equity to cure a covenant breach?
- Prepayment terms: Can you pay down early without penalty?
- Commitment period: Longer is better for planning certainty
The Bank Selection Decision
Rate isn't everything. Consider:
- • Banker experience with your industry
- • Bank's appetite for your company size
- • Flexibility during difficult periods
- • Additional services (treasury, international)
- • Decision-making speed and local authority
Managing Your Facility
Once you have a facility, active management maximizes its value and preserves the relationship.
- Monitor covenants monthly: Know where you stand before the bank asks
- Communicate proactively: If you'll miss a covenant, tell the bank early
- Use the revolver appropriately: Draw and repay regularly—banks want to see usage
- Keep financial statements current: Delayed reporting creates lender concern
- Maintain the relationship: Regular check-ins, not just when you need something
Refinancing Timing
Start refinancing discussions 9-12 months before facility maturity. Don't wait until the last minute—banks need time to underwrite, and you want leverage to negotiate. Running up against maturity with no alternative weakens your position.
When You Should Have a Facility
Most established companies benefit from having a credit facility, even if they don't currently need to draw on it.
You Need a Facility If...
- • Cash flow is seasonal or lumpy
- • Growth requires working capital investment
- • You're considering acquisitions
- • Customer payment cycles are extending
- • You want buffer against unexpected events
You May Not Need One If...
- • Strong cash position with consistent generation
- • Business model is inherently cash-positive
- • Owner prefers zero debt philosophy
- • Business is very small (under $2M revenue)
The Umbrella Principle
Banks are happy to lend you an umbrella when it's sunny—and may ask for it back when it rains. Secure credit facilities when your business is strong, not when you desperately need them.
Related Resources
Need Help Structuring Credit Facilities?
Eagle Rock CFO helps companies evaluate, negotiate, and manage credit facilities. Let's discuss your financing needs.
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