What is a Credit Facility? Types, Uses, and How It Works

When you hear the term credit facility, you might think it’s only for large corporations. In reality, it’s simply an agreement with a bank or lender that lets you access funds when you need them. But in fact, both businesses and individuals in Ontario can benefit from it. You borrow the money, pay it back, and then borrow again. It’s not like a regular loan; you don’t always get the full amount at once.

It is beneficial for both businesses and people in Canada. In this article, you will learn about what a credit facility. The different types and how they work. Explain why it matters for business and individuals in Canada.

To learn about money and services for businesses, check out Bestax CA’s financial services.

What is a Credit Facility?

A credit facility is a financing agreement between a lender and a borrower. It gives the borrower access to funds over an extended period without having to apply for a new loan each time. In fact, there is no need to apply for the loan each time. You can use money for expansion, buying inventory, or even for working capital.

This facility helps to keep things flexible.  To get information for business funding in Canada, you can read Bestax blog on the types of business loans available in Canada. Federally regulated banks in Canada must disclose clear terms for any credit facility, including interest rates, fees, repayment conditions, and collateral requirements.

Moreover, it is a safety net. Instead of applying for a new loan every time, you get an approved limit and can use it as needed.

For example:

• A business may have a corporate credit facility with a $500,000 limit to cover payroll and supplier payments.
• A household may use a retail credit facility, such as a line of credit, to handle large expenses like home renovations.

How Does a Credit Facility Work?

A credit facility is an agreement between a bank (lender) and a borrower. You can take a limited amount of money when needed.   Having a credit facility means you can borrow up to a certain amount.  It is called a credit limit. The agreement is done when the documentation is complete. The agreement sets out the credit limit, interest rate, fees, renewal terms, and any covenants or collateral requirements. For more on how business lines of credit work in Canada, see Bestax business line of credit overview.

A credit facility usually comes with:

• An assessed credit limit. Means the maximum amount you can borrow.
• Draw-and-repay with flexibility. You can take funds, repay, and borrow again (if it’s revolving).
• Facility agreement terms, including interest rates, fees, collateral requirements, and covenants, are written in a contract.
• Repayment schedule depending on the type, you may repay monthly, at maturity, or when you draw funds.

There may be commitment charges from the bank for keeping the facility available.  The charges may apply even if you don’t use it.

Types of Credit Facility

There are several types of credit facilities used in Ontario and across Canada. Let’s break them down:

1. Revolving Credit Facility

• Allow borrowers to repeatedly draw and repay funds up to a specific limit.
• Works like a revolving credit line (similar to a credit card).
• You borrow money, repay it, and can borrow again.
• Useful for working capital financing.
• Example: A business line of credit from a bank.

2. Committed Credit Facility

• The lender guarantees funds will be available as long as the borrower meets conditions.
• Often used by large corporations.
• In this type, the bank must lend if you follow the agreement
• It often has debt covenants and a commitment fee.

3. Retail Credit Facility

• It is offered to individuals, not businesses.
• Most often includes personal lines of credit, overdraft protection, or credit cards.
• This type of credit facility is common for managing household cash flow.

4. Corporate Credit Facility

• It is more common for companies that need large financing.
• The facilities include letters of credit, working capital lines, or revolving facilities.
• Often part of a liquidity management tool for corporations.

5. Facility Loan vs. Term Loan

• A facility allows you to borrow up to an approved limit when needed (often revolving).
• A term loan provides a fixed lump sum at the start, which you repay in instalments over a set schedule.

Common Uses of a Credit Facility

Businesses and individuals in Canada use credit facilities for:

• Credit facilities are commonly used for working capital, funding projects, covering seasonal costs, and managing emergency cash flow.
• Working capital financing includes payroll, rent, and inventory.
• Emergency expenses and unexpected costs.
• Growth investments (new equipment, expansion).
• Borrowers may be asked to provide collateral as security. 
• Liquidity management ensures cash is available when needed.
• Seasonal expenses, for example, holiday inventory for retailers and farming costs.

Credit Facility Agreements

When you set up a facility, you’ll sign a facility agreement. They are versatile and can be used for various purposes. This includes:

• Credit limit (how much you can borrow).
• Collateral requirements. The borrowers may be asked to provide collateral as security.
• Interest rate and fees, including the commitment fee
• Covenants rules the borrower must follow, like keeping debt below a certain level
• Renewal process. That means many facilities must be reviewed annually

Credit Facility vs Loan

It’s important to understand the difference between a credit facility and a loan. Many people confuse a credit facility with a loan, but the two work differently. Here is the clear difference

• Loan

The amount of the loan is fixed for a specific time. Most often, you have to repay the amount with interest.

• Credit Facility

A credit facility gives you flexibility and access to funds. You can borrow what you need and when you need it. This flexibility is making credit facilities ideal for businesses with changing needs.

How Credit Facilities Work

StepFeature	What It Means (Simple Words)	Why It Matters for You
Credit Limit	The maximum amount you can borrow (like a spending cap).	Helps you know your borrowing power and plan expenses.
Draw and Repay	You take money when needed, repay later, and can borrow again (if revolving).	Gives flexibility money is there when you need it.
Interest	You only pay interest on the money you actually use, not the whole limit.	Saves money compared to a fixed loan you don’t fully use.
Collateral	Some facilities need security (like property, receivables, or equipment).	Lowers the bank’s risk, which can get you better terms.
Fees	Banks may charge a commitment fee to keep the facility open.	Even if you don’t use it, you pay a small cost for having it ready.
Review & Renewal	The bank checks your financial health (often yearly) to keep or adjust the facility.	Keeps your borrowing in line with your current business situation.

Need Help with a Credit Facility?

A credit facility can be a powerful tool. For managing cash flow, funding growth, and keeping your business financially strong. All you need to know is your needs, your turnover, and your repayment ability.  But with the right advice, you can set up the process the right way. At Bestax Accountants, we help businesses choose the right credit facility, understand the terms, and stay compliant with financial reporting requirements.

Secure the right facility the first time. Work with Bestax CA for expert guidance today!

Quick FAQs

Disclaimer: The information provided in this blog is for general informational purposes only. For professional assistance and advice, please contact experts.