Credit Card Capital 101: Understanding Credit Facilities

Credit facilities also come with unique benefits. Unlike traditional loans, credit facilities tend to be dedicated facilities. They can only be used for certain lending products and have guardrails on the types of customers you can approve for the line. It’s important to be strategic when considering credit facilities to fund a credit card program. 

‍

This article defines a credit facility, explains how it works, and discusses why it’s important for credit card programs. 

What is a Credit Facility?

A credit facility enables a business to take out a loan over an extended period to generate capital. A credit facility provides greater flexibility than a traditional loan, allowing a business to take out money without the need to reapply for a loan each time money is needed. That said, credit facilities for lending products are highly restrictive regarding how they can be used. 

‍

As an agreement between a lender and a borrower, a credit facility typically includes debt covenants, withdrawal fees, and maintenance fees, which vary based on the financial health and credit history of the borrowing business. Credit facilities are often more difficult to secure than traditional loans. 

‍

What are the Different Types of Credit Facilities?

There are several types of credit facilities, including revolving loan facilities, committed facilities, and letters of credit. Additionally, a credit facility may be classified as short-term or long-term, with the latter providing the greatest flexibility but coming at a higher cost due to the risk. Short-term credit facilities use a business’s operating receivables or inventory as collateral and often provide favorable loan terms. 

‍

Let’s explore some of the different types that may come into play for credit cards:

‍

Term Loan: A term loan provides a lump sum of money to a business that the business repays over a set period. A term loan is often used to fund new technology purchases related to running a credit card program. 

‍

Retail Credit Facility: This type of credit facility has an Advance Rate of less than 100% and is secured by the credit card receivables the business’s credit card program generates (which is illustrated in an example at the bottom of this article). Credit facilities for credit cards fund the purchases made by cardholders and any revolving balances they maintain. 

‍

The size of the credit card program, the type of credit card customers, the business’s financial health, and the company’s creditworthiness all factor into what type of credit facilities a business decides to use. 

‍

How Do Credit Facilities Work for Credit Cards?

Businesses that want to offer credit cards must either self-finance or obtain a credit facility (or multiple credit facilities) for funding. This is necessary to ensure that the business can both meet the demand for credit from its customers and maintain an adequate level of credit available to those customers. Without access to sufficient funds, the business may be unable to issue credit cards or may have to limit the amount of credit available to its customers, which could be detrimental to the success of its credit card program.

‍

Both the issuing bank and the credit facility have a say in underwriting the credit cards, setting the credit limits, and managing the credit card accounts. The issuing bank will typically hold the receivables for anywhere from one to five days before selling them to the business or the credit facility with some interest added on as a cost of bearing some of the risk. 

‍

The issuing bank often holds the receivables for that short time frame to ensure they are officially the Lender of Record and to be able to charge interest on the balance during the holding period. The special purpose vehicle (a legal entity set up specifically to provide the capital to the credit program(s), also referred to as an “SPV”) will buy the receivables from the bank. Daily reporting and settlement track payments, fees, interest, losses, and net interest, and the SPV is paid back as cardholders make payments.  

‍

Net Interest Income = APR - Cost of Funds (COF) - chargeoff/losse

‍

Issuing banks require businesses to have an escrow account that holds multiples of the average daily or weekly volume in case the business does not buy the receivables. For example, some issuing banks require escrow accounts to hold three times the daily average of the previous month’s transactions or two times the amount of the previous two weeks’ transactions plus an additional $50,000. Issuing banks have varying requirements for escrow accounts that depend on a variety of factors. 

‍

For businesses that use one or more third-party capital providers, it’s important to understand the terms for each credit facility. Each may have a different risk tolerance, and most do not extend credit to cover 100% of your receivables. For example, if a business has $10M in monthly credit card charges and the credit facility advances 90%, the business must be able to cover the remaining $1M in receivables. Businesses should be aware of this when choosing credit facilities, which usually provide anywhere from 65% to 90% facility. 

‍

Working with the right credit facilities is foundational to a successful credit card program. With an understanding of the different types, the roles they play, and how they factor into daily operations, you can make the most strategic decisions for your program. 

‍