What Is a Facility Agreement?

If you’re growing a business, cash flow can start to matter just as much as sales. You might have a strong pipeline, but you still need working capital to pay suppliers, hire staff, buy equipment, or smooth out seasonal ups and downs.

That’s where a facility agreement often comes in.

In simple terms, a facility agreement is the contract that sets the rules for a finance “facility” (for example, a business loan, line of credit, or other funding arrangement). It’s one of the most common (and important) finance documents you’ll sign as a founder.

In this guide, we’ll walk through what a facility agreement is, what it usually includes, why it matters, and the key legal and practical issues Australian small businesses and startups should watch out for before signing.

A facility agreement is a formal contract between a lender (like a bank or other financier) and a borrower (your business), setting out the terms on which the lender makes funding available.

The “facility” is the funding arrangement itself. Depending on your business and what you’re trying to achieve, that might be:

A term loan: you borrow a fixed amount and repay it (usually with interest) over a set period.
A revolving credit facility / line of credit: you can draw down up to a limit, repay, and redraw again.
An overdraft: your business account can go into a negative balance up to a limit (subject to conditions).
Invoice or receivables finance: funding linked to your outstanding invoices.
Equipment or asset finance: funding used to purchase business assets (sometimes with the asset as security).

Facility agreements can be used by early-stage startups, mature SMEs, and growing businesses alike. Even if the funding “feels straightforward”, the agreement is often detailed, because it’s the lender’s playbook for managing risk.

Practically, a facility agreement answers questions like:

How much can you borrow (and when can you draw down)?
What will it cost (interest, fees, default interest)?
What security is the lender taking (if any)?
What promises is your business making?
What events allow the lender to cancel the facility or demand repayment?

When Do Small Businesses Use Facility Agreements?

Facility agreements often show up at major “step-up” moments in a business. You might see one when you:

Need working capital to cover stock purchases, payroll, or supplier payments while you wait for customer invoices to be paid
Want to fund expansion (new premises, new location, new market, larger team)
Buy equipment (vehicles, machinery, hardware, fit-outs)
Acquire another business or buy out a co-founder
Need a buffer to manage seasonal revenue

For startups, funding can also interact with ownership and governance. If your business has multiple founders or investors, the funding terms (and any personal guarantees) can create tension if they aren’t discussed early and documented properly in a Shareholders Agreement.

Even if you’re “just getting a loan”, facility agreements can contain obligations that affect how you run your business day-to-day. That’s why it’s worth treating them as more than a standard formality.

What Terms Are Usually In A Facility Agreement?

Facility agreements vary by lender and by the type of facility, but most include a similar set of building blocks. Below are the clauses we commonly see businesses needing help with, either in negotiating the terms or understanding the practical consequences.

Facility Amount And Purpose

This sets out the maximum amount available and sometimes the specific purpose (for example, “working capital” or “equipment purchase”).

If the agreement restricts the purpose, using the funds outside that purpose can become a breach of the agreement.

Drawdown Conditions

This is what you must do before you can access the money. Typical conditions include:

Signing all finance documents
Providing identification and corporate documents
Providing financial statements or budgets
Providing evidence of insurance
Registering security interests (more on PPSR below)

Interest, Fees, And Costs

Facility agreements generally include:

Interest: fixed or variable, and how it’s calculated
Fees: establishment fees, ongoing account fees, line fees, review fees
Default interest: a higher interest rate if you’re in default
Recovery costs: the lender’s costs if they need to enforce the agreement

From a business perspective, you’ll want to understand not just the headline rate, but how fees and default interest can change the real cost of capital.

Repayment And Term

This covers when repayments are due and how they’re applied (for example, interest-first, or principal and interest), as well as whether the facility can be renewed, rolled over, or must be repaid by a specific date.

Security And Guarantees

Many facility agreements are secured. That may include:

Security over business assets (often documented as a security agreement or “general security”)
Specific security over particular assets (for example, a vehicle or equipment)
Personal guarantees from directors or founders

This is a key risk area for small business owners. A personal guarantee can mean your personal assets may be at risk if the business can’t repay, even if the business is operated through a company.

If your lender requires security over business assets, it may be documented in a separate agreement such as a General Security Agreement, alongside the facility agreement.

Representations And Warranties

These are statements your business makes about its situation at the time of signing (and sometimes ongoing). Examples include that:

your business is properly incorporated and has authority to enter into the agreement
the information you’ve provided is accurate
there is no litigation that could materially affect the business
you’re not insolvent

They sound standard, but they can create real risk if something is incorrect or incomplete.

Covenants (Ongoing Promises)

Covenants are the “rules” you agree to follow while the facility is in place. They often include:

Information covenants: provide financials, management accounts, budgets, tax information
Financial covenants: maintain certain ratios or minimum liquidity
Negative covenants: don’t take on new debt, don’t sell key assets, don’t change business structure without consent

These clauses can affect growth decisions. For example, if you want to raise more funding or restructure your group, your facility agreement might require lender consent first.

Events Of Default

This section explains what counts as a default and what the lender can do if a default happens. Common events of default include:

missing a payment
breach of a covenant
incorrect warranties
insolvency events
certain legal disputes or regulatory action

It’s also common to see “cross-default” clauses, where a default under another agreement triggers a default under the facility agreement too.

Understanding these triggers is crucial, because default rights can include the lender freezing drawdowns, increasing interest, demanding immediate repayment, or enforcing security.

How Does Security And The PPSR Fit In?

In Australia, lenders often protect themselves by registering a security interest on the Personal Property Securities Register (PPSR). This is the national public register where security interests in personal property (like equipment, inventory, receivables, and other business assets) can be recorded.

If your facility is secured, you might see clauses that require you to:

sign security documents
help the lender register their security
avoid granting competing security interests without consent

For small businesses, this matters because a registered security interest can impact future funding, refinancing, and even a sale of the business. It’s also relevant if you buy assets from other businesses, since you want to ensure they’re not subject to someone else’s security interest.

In some cases, it’s useful to do a PPSR search as part of due diligence, particularly if you’re buying equipment, vehicles, or acquiring a business. A practical starting point is understanding a PPSR and what a registration means for your risk exposure.

If you’re planning an asset purchase and want a general overview of how searches can work in practice, a PPSR check can help you identify whether an asset may be subject to existing security.

Keep in mind: PPSR issues can be time-sensitive and technical. If you’re unsure how the facility security interacts with your other agreements (or future funding plans), it’s worth getting advice before signing.

What Should You Watch Out For Before Signing A Facility Agreement?

Most facility agreements are written to protect the lender, so it’s normal to feel like the document is “one-sided”. The goal isn’t always to negotiate every clause (sometimes you won’t have much leverage), but to make sure you understand what you’re agreeing to and avoid any avoidable surprises.

Here are some practical risk areas to pay attention to.

Personal Guarantees And Director Risk

If the lender wants a personal guarantee, pause and consider:

Is the guarantee limited or unlimited?
Does it cover only this facility, or “all moneys” you owe the lender?
When does it end (if ever)?
Are multiple directors jointly and severally liable (meaning the lender can pursue any one guarantor for the full amount)?

This is often the most financially significant commitment founders sign, so it’s important to treat it seriously and align expectations between co-founders.

Operational Restrictions That Affect Growth

Some covenants can be “quietly” restrictive. For example, you may need lender consent to:

raise new debt
change your business structure
sell key assets
pay dividends (for more established SMEs)

If you’re moving quickly (typical for startups), you don’t want to discover you’ve agreed to restrictions that slow down fundraising, restructuring, or expansion.

Broad “Event Of Default” Triggers

Events of default aren’t always limited to non-payment. Some are triggered by things that can happen in ordinary business life, like a dispute or a technical reporting failure.

It’s worth checking how cure periods work (i.e. whether you get time to fix a breach before it becomes a default) and whether the lender has discretion to call a default.

Information And Reporting Burdens

Reporting covenants can be reasonable (like providing annual financial statements), or they can be ongoing and time-consuming (like monthly accounts, budgets, and KPI reporting).

If you’re a lean team, you’ll want to make sure the reporting obligations are realistic. Otherwise, you can unintentionally breach the agreement simply due to admin load.

Conditions Precedent That Delay Funding

Sometimes businesses negotiate a deal assuming funding will be available by a certain date, only to find the drawdown conditions take longer than expected (for example, getting valuations, insurance certificates, or extra documentation).

If the timing matters (like settlement on a purchase), you’ll want to plan around these conditions early.

Interaction With Your Other Legal Documents

Facility agreements don’t exist in isolation. For example:

If your business is a company, lenders may want comfort that your governance documents (like your Company Constitution) allow you to enter the facility and grant security.
If you’re buying a business or assets, the purchase contract and settlement conditions need to align with drawdown and security requirements.
If you’re entering supplier contracts, consider whether the facility restricts new obligations or requires consent for major contracts.

When these documents conflict, it can create delays, disputes, or an unexpected default.

What Other Legal Documents Might You Need Alongside A Facility Agreement?

A facility agreement is often just one part of the funding “paperwork stack”. Depending on the lender and your structure, you might also need some of the following documents in place.

Security documents: such as a general security agreement, specific security, or charges over particular assets.
Guarantee and indemnity documents: especially where directors or related entities guarantee the debt.
Shareholder or founder documentation: where multiple founders are involved, a Shareholders Agreement can help set expectations around approvals, funding decisions, and what happens if someone needs to step back.
Key customer or supplier contracts: if revenue relies on key relationships, well-drafted agreements can reduce risk and strengthen your position during lender due diligence.
Employment documents: if you’re scaling your team, having a compliant Employment Contract helps set clear expectations and reduces disputes that can disrupt operations.
Privacy compliance documents: if you’re collecting personal information (for example via your website, app, or mailing list), a Privacy Policy is a practical baseline for compliance and customer trust.

Not every business will need every document above, but it’s common for facility arrangements to trigger a “tidy up” of your legal foundations, especially if you’re moving from an early stage into a more structured growth phase.

Key Takeaways

A facility agreement is the contract that sets the terms for a funding facility (like a business loan or line of credit) and explains how the money can be used, repaid, and enforced.
Most facility agreements include clauses on interest and fees, drawdown conditions, security, guarantees, ongoing covenants, and events of default.
Security and PPSR registrations can affect your future funding, business sale plans, and asset purchases, so it’s worth understanding how they work before signing.
Common risk areas include personal guarantees, restrictive covenants that limit growth decisions, broad default triggers, and heavy reporting requirements.
Facility agreements often interact with your broader legal setup (company governance, founder arrangements, customer and supplier contracts), so it’s important to make sure everything aligns.

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.

What Is a Facility Agreement?