What it means
A bank facility letter sets out the terms on which a lender proposes or agrees to make credit available, and it may cover an overdraft, term loan, revolving line, trade-finance facility or several products together. The letter usually names borrower, limit, pricing, maturity, security and conditions, and it should be read with the full document pack, not as a one-page price quote.
A limit states a ceiling under defined conditions, so a business with a $2 million revolving facility cannot necessarily withdraw $2 million today, because utilisation, borrowing-base tests, clean-down rules or conditions precedent may restrict availability and cash forecasts should use what can actually be drawn and when. Pricing may have several layers: the interest margin can sit on top of a reference rate, and arrangement, commitment, utilisation or renewal fees may apply.
A floating-rate facility changes cost when its benchmark moves, so ask the bank for an all-in illustration under current and stressed rates. An unused-commitment fee may be charged on undrawn committed capacity, so if the contract states 0.5% annually on $1.5 million unused for a full year, a simple illustration is $7,500 before any day-count details, though not every facility charges this fee and the borrower should confirm whether it applies, how availability is measured and when it is billed.
Security deserves separate attention, as the bank may take a charge over receivables, inventory or property, or ask a director or affiliate for a guarantee. The facility letter might summarise these obligations while separate legal documents create them, so a guarantor should review the full exposure and get advice, not rely on a short summary.
Conditions precedent are tasks to finish before initial borrowing, such as corporate approvals, signed security documents, insurance evidence, legal opinions or financial statements, and a bank can approve a facility in principle while waiting for these, so keep an owner and date for each condition to avoid a funding gap. Covenants set continuing obligations, such as maintaining a debt ratio, submitting management accounts or limiting new borrowing and disposals.
Define calculation terms carefully because a ratio can change when an accounting standard or acquisition changes reported numbers, and build covenant forecasts alongside cash forecasts. A breach can give the lender rights under the documents, potentially including restrictions or acceleration, subject to notice, cure and waiver terms, so a missed ratio does not automatically mean immediate repayment, but advisers should be informed early and a written waiver or amendment sought if needed, because verbal comfort from a relationship manager may not change a signed contract.
The Loan Market Association publishes documentation and market guidance for finance transactions, and a borrower's guide to LMA investment-grade agreements explains the structure of common clauses. These are useful context, but a bilateral small-business letter may differ substantially, and the signed documents and local law govern the actual facility.
Review the purpose clause, since a line approved for working capital may not be used to buy property or fund a shareholder distribution, and check whether the facility is committed or can be cancelled on demand, because a limit without reliable term can be unsuitable for a long-lived investment. Repayment and renewal terms matter: a term loan may amortise monthly, an overdraft may be reviewed annually and remain repayable under its terms, and the date labelled "review" need not mean automatic extension, so plan alternative funding before maturity rather than waiting for a renewal conversation a week ahead.
Before acceptance, compare offers on usable proceeds, total costs, tenor, covenants and flexibility, since a lower margin might be paired with stricter security or reporting, and ask for clarification in writing so negotiated changes appear in the final documents before the authorised signatory signs after internal approval. After closing, maintain a calendar for interest payments, reporting dates, covenant tests, insurance and renewal, store executed documents where finance can retrieve them, and reconcile bank charges against the agreed pricing, because a facility letter is useful when its obligations are tracked throughout the borrowing period, not filed away after the first draw.
In practice
Real-world examples.
Example
A facility letter offers a $2 million overdraft and a $5 million trade limit. The finance director notes that both limits sit under one overall cap and that availability depends on conditions. Her cash forecast uses the amount actually drawable, not the sum of the headline limits.
Example
It requires a personal guarantee from the owner. The owner reads the full guarantee document, not just the summary line in the letter, and takes legal advice before signing. The exposure turns out to be wider than the summary suggested.
Example
A covenant limits debt to three times EBITDA (earnings before interest, tax, depreciation and amortisation). If forecast EBITDA is $1,200,000, debt may not exceed $3,600,000, and the borrower tests the figure before any new borrowing.
Formula
Calculation
Annual commitment fee = Unused facility x Commitment fee rate
Worked example. Unused facility of $1,500,000 at 0.5%: $1,500,000 x 0.5% = $7,500 a year.
Part-drawn example. A $2,000,000 revolving facility with $1,200,000 drawn leaves $2,000,000 - $1,200,000 = $800,000 unused. At the same 0.5% rate the annual commitment fee is $800,000 x 0.5% = $4,000, which is about $333 a month, and it falls as the company draws more.Case study
Seen in the real world.
This illustrative and entirely fictional case follows Lantern Foods, an invented wholesaler seeking an overdraft and import line. Its finance team compares the bank's facility letter with the budget, security documents and covenants. It asks the bank to clarify an unused-commitment fee before acceptance.
No funding or renewal outcome is guaranteed by this example. Lantern also builds a calendar of the conditions precedent, assigning an owner and a date to each, so that the import line is available before its busy season starts. Later it adds covenant tests to its monthly forecast, so any pressure on the debt ratio appears months before a test date rather than on it.
Watch out
Common mistakes.
- Treating the headline credit limit as cash already available to draw.
- Ignoring covenants, security, fees and cross-default provisions while comparing rates.
- Assuming the facility will renew automatically when the stated review date arrives.
Questions
People also ask.
What is a bank facility letter?
A written offer or record of a bank credit facility and its terms, subject to conditions and documents.
What does it include?
Limits, pricing, security, conditions and covenants.
Can terms be negotiated?
Yes, before signing.
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