What Is a Facility Agreement and How Does It Work?

Securing the right finance can unlock the next stage of growth for your small business. Whether you need working capital to cover cash flow gaps, a line of credit to manage seasonality, or funds to purchase equipment, there’s a good chance a lender will offer you a facility agreement.

If you’re wondering “what is a facility agreement, and what should I look out for?”, you’re not alone. The terms can be long, the jargon can be confusing, and the risks are real if you sign something you don’t fully understand.

In this guide, we break down facility agreements in plain English, highlight the clauses that matter, and share practical steps to negotiate terms that support your business goals.

What Is A Facility Agreement?

A facility agreement is a contract between a lender (often a bank or finance company) and your business that sets out the terms on which the lender will make funds available to you. Think of it as the “rule book” for your funding arrangement.

Unlike a simple one-off loan, a facility can be flexible. It might be a revolving line of credit, an overdraft, a term loan, an equipment finance facility, or a combination of these under a single umbrella document.

Key features typically include:

• The types of funds you can access (e.g. revolving facility, term loan, overdraft).
• How much you can borrow (the limit) and when you can draw funds.
• Interest, fees and how they’re calculated.
• Security the lender requires (if any).
• Ongoing obligations (“undertakings”) your business must meet.
• Events that allow the lender to call in the facility early (“defaults”).

In short: a facility agreement gives you access to business finance, but it also sets the rules you need to comply with to keep that finance available.

How Do Facility Agreements Work In Australia?

While each lender has its own approach, most business facilities in Australia follow a similar life cycle.

1) Application And Assessment

You apply for a facility and provide financial information so the lender can assess risk. They’ll consider revenue, profitability, existing liabilities, cash flow and your business plan. This is also the time to clarify what you need: a revolving limit, a term loan for equipment, or both.

2) Term Sheet Or Heads Of Terms

Often, the lender issues a term sheet summarising the proposed facility limit, pricing, security and key conditions. Treat this as a negotiation stage. It’s easier to align on principles now than to reopen points later in the full document.

3) Draft Facility Agreement And Security Documents

Once terms are agreed, the lender prepares the facility agreement and any related security documents. For example, they may require a General Security Agreement over your company’s assets and a director guarantee. These documents usually work together.

4) Conditions Precedent

Before you can draw funds, you’ll need to tick off “conditions precedent” (CPs). Common CPs include signing the agreement, providing company documents, registering security on the Personal Property Securities Register (PPSR), and providing insurance certificates.

5) Drawdowns And Ongoing Obligations

After CPs are met, you can draw down funds (subject to the facility rules). From there, you’ll need to comply with ongoing undertakings, provide periodic financial information and maintain any required ratios or covenants.

6) Review, Renewal Or Exit

Facilities are reviewed periodically. The lender might renew, adjust limits, or ask for changes if your risk profile has shifted. If you refinance elsewhere or repay the facility, you’ll work through a discharge process to release security.

Key Clauses To Look For In Your Facility Agreement

Every clause matters, but some clauses have outsized impact on your risk and flexibility. Here are the provisions small business owners should pay close attention to.

Facility Type, Limit And Purpose

Make sure the “Facility” section aligns with what you actually need. If you rely on a revolving limit for weekly working capital, check it’s truly revolving and not a term loan dressed up as one. Confirm the stated purpose matches your intended use to avoid issues at drawdown.

Interest, Fees And Margin Changes

Understand how interest is calculated (fixed vs variable, base rate plus margin) and when it can change. Look for establishment fees, line fees (charged on undrawn amounts), utilisation fees, prepayment fees and break costs. If there’s a “market disruption” or “increased costs” clause, check when the lender can pass on extra costs.

Term, Repayments And Prepayment

How long does the facility last? What’s the repayment profile (interest-only vs amortising)? Can you prepay without penalty? If there’s a balloon payment at the end, model the impact on cash flow well in advance.

Financial Covenants

Covenants are financial conditions (like minimum net worth, interest cover or leverage ratios) you must maintain. Ensure they fit your business model and seasonality. If you have lumpy revenue, quarterly testing might be tough-discuss flexibility or cure rights upfront.

Information Undertakings

Most lenders require regular financial reports. Clarify the timing, format and scope so you can build reporting into your monthly processes. If audits are required, factor that cost and timing into your plans.

Security And Guarantees

Security gives the lender rights over assets if you default. We cover the common forms of security below, but in the agreement itself, check the security schedule carefully. Understand exactly which assets are charged, and whether guarantees are capped or unlimited.

Events Of Default And Remedies

These clauses set out when the lender can reduce limits, cancel the facility or demand repayment. Look for:

• Payment defaults (usually a short grace period applies).
• Breach of covenants or undertakings.
• Material adverse change (MAC) triggers-ask for clear, objective wording.
• Cross-defaults (a default under another agreement triggers default here).
• Insolvency-related triggers.

Push for reasonable cure periods and proportional remedies where possible.

Representations And Warranties

You’ll confirm that information you’ve provided is true and that your business is compliant with laws and licenses. Ensure the statements are accurate and not overly broad, and add materiality qualifiers where appropriate.

Assignments, Transfers And Review Rights

Can the lender assign the facility to another funder? Can they change margins on review? Understand how and when your facility terms might change without your consent.

Amendment And Waiver

Most changes need to be in writing signed by both parties. If you expect your business to evolve quickly, it’s helpful to agree a practical amendment process and reasonable costs for variations.

What Security Might A Lender Require?

Security is common for small business facilities. It reduces the lender’s risk and can improve pricing, but it also increases your exposure if things go wrong. Typical security includes:

General Security Over Assets

A lender may require a company-wide charge over present and after-acquired property. This is usually documented by a General Security Agreement and then perfected by a PPSR registration.

To understand the national register used for security interests, it’s worth reading what the PPSR is and how it works for businesses. Lenders (and sometimes suppliers) use it to publicise and protect their priority rights.

Specific Security Over Equipment Or Receivables

Equipment finance or invoice finance facilities often take security over a specific asset or debtor book. Again, these interests should be registered on the PPSR so priority is clear. If you ever take security yourself, you’ll need to register a security interest correctly and on time.

Personal Guarantees

Directors or owners are frequently asked to guarantee the company’s obligations. A guarantee means you’re personally liable if the company can’t pay. Before signing, understand the risks set out in this overview of Personal Guarantees, and consider whether a capped or limited guarantee is possible.

Where a formal guarantee document is required, lenders may use a Deed Of Guarantee And Indemnity. Check if it includes an indemnity (which can be broader than a guarantee) and what triggers your liability.

Bank Guarantees Or Letters Of Credit

In some projects or leases, a third party might ask you to provide a bank guarantee. Your facility may allow the bank to issue these on your behalf (which still counts towards your limit). If you’re new to them, this guide to Bank Guarantees explains how they work and what risks to watch.

PPSR Registration And Priority

Security is only as strong as its registration and priority. Check that the lender’s PPSR registrations reflect the agreed security and don’t inadvertently capture assets you didn’t intend to charge. If you have existing secured creditors, confirm intercreditor or priority arrangements are documented.

Facility Agreement Vs Other Finance Documents

It’s easy to confuse a facility agreement with other funding documents. Here’s how they compare so you can pick the right tool for the job.

Facility Agreement Vs Loan Agreement

A facility agreement can cover multiple forms of funding (e.g. an overdraft and a term loan under one umbrella). A Loan Agreement is typically a single advance with a defined repayment schedule. If you need ongoing flexibility to draw and repay, a facility is more suitable. If you just need a one-off lump sum, a simple loan may be enough.

Facility Agreement Vs Vendor Finance

When buying a business, the seller might agree to fund part of the price and be repaid over time. That’s documented using a Vendor Finance Agreement. It’s not a bank facility, but it’s still finance and will usually include security, default terms and PPSR registrations.

Facility Agreement Vs Director Or Shareholder Loans

Sometimes owners lend money to their own company. That’s usually documented with a simple loan or board resolution rather than a full facility agreement, but you still need clarity around terms, interest and repayment-especially if other creditors are involved.

Facility Agreement And Security Package

Most facilities come with a “security package” made up of several documents: the facility agreement itself, security agreements (e.g. general or specific security), guarantees, and sometimes mortgages. Read them together-the practical effect sits in the package as a whole.

Step-By-Step: Negotiating And Signing With Confidence

Here’s a practical process you can use to keep control of your finance deal and avoid surprises.

1) Clarify Your Objectives And Constraints

Start by defining what you actually need: how much funding, for how long, and how you’ll use it. Be honest about your seasonality, growth plans and cash flow risks. The clearer your brief, the better the outcome.

2) Compare Term Sheets, Not Just Rates

Price matters, but so do covenants, fees, security, review rights and default triggers. Build a simple comparison table so you can weigh the whole package, not just the headline margin.

3) Stress-Test The Numbers

Model best case, base case and downside scenarios. Can you still meet covenants if revenue dips 15%? What if a key client pays late? If the margin can reprice on review, what’s the impact of a 1% increase?

4) Tidy Up Your House

Make sure your corporate records, licences and insurances are current. If your company has no formal constitution or outdated shareholder arrangements, consider putting a clear Company Constitution and Shareholders Agreement in place before taking on debt. These documents support clean approvals and decision-making.

5) Negotiate The Deal-Breakers

Focus negotiation on points that materially affect risk and flexibility:

• Security scope and guarantee caps.
• Covenants and testing frequency.
• Default triggers (especially any “material adverse change” wording).
• Prepayment rights and break costs.
• Review and margin change mechanisms.

Lenders expect some negotiation-ask for terms that reflect your business reality.

6) Check The Security And PPSR Details

Confirm the security documents match what you agreed. Check asset descriptions, guarantee limits and signatories. After signing, verify that PPSR registrations correctly reflect the agreed collateral and priority positions.

7) Plan For Compliance From Day One

Set up a simple compliance calendar for covenant testing dates, information undertakings, insurance renewals and financial reporting. Allocate responsibility within your team so nothing slips.

8) Get Tailored Legal Advice

Facility agreements bundle legal, financial and operational risk. Having a lawyer review the draft against your term sheet and business plan can save costly headaches later. If security is involved, ensure any registrations are accurate-errors can affect priority and enforcement rights. If you need support preparing or reviewing security documentation, we can help you register a security interest correctly and align the paperwork with your deal.

Key Takeaways

• A facility agreement is a flexible funding contract that sets the rules for how your business can borrow, what it costs and what you must do to keep access to funds.
• Look closely at pricing mechanics, covenants, security and default triggers-they have the biggest impact on your day-to-day flexibility and risk.
• Lenders commonly require security, such as a General Security Agreement and director guarantees, often supported by PPSR registrations.
• Understand how a facility compares with other options like a straightforward Loan Agreement or a Vendor Finance Agreement so you choose the right tool for your needs.
• Before signing, stress-test your covenants, confirm the security scope, and make sure any PPSR registrations match the deal you agreed.
• Getting legal advice on the facility terms, guarantees and security documents-plus how to handle the PPSR-can protect your position and prevent unpleasant surprises.

If you’d like a consultation on reviewing or negotiating a facility agreement for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.