Facility Letter: What It Is and Key Clauses to Check

A facility letter lands on your desk at a critical moment: it sets out the bank's offer of finance and the steps you must take to get the money. But is it binding? What conditions trap you? Which clauses should you negotiate before signing? This practical guide explains what a facility letter (also called a letter of offer or facility offer) is, how it differs from other loan documents, the clauses you must read first, and a checklist and redline tips to protect your business. Read this if you're a finance manager, in-house counsel, borrower, guarantor or adviser preparing to respond to a lender's offer.

What is a facility letter?

A facility letter (sometimes called a letter of offer or facility offer) is the lender's written confirmation of the terms on which it proposes to provide one or more funding facilities to a borrower. It usually sits between a high-level term sheet and the detailed facility agreement and security documents. Key features:

• Purpose: provide a short-form record of the main economic and commercial terms — facility amount, type (term loan, revolving, overdraft), interest margin, fees, drawdown window, and key conditions precedent (CPs).
• Function in the lifecycle: issued after pricing and credit approval; often used to secure board approval, reveal conditions for drawdown, and start negotiation of the long-form facility agreement and security deeds.
• Binding effect: varies. Many facility letters say they are not legally binding except for certain clauses (e.g., exclusivity, confidentiality, fees or commitment). Others create binding obligations to provide the facility subject to CPs. You must check the wording — do not assume a facility letter creates a final, drawdown-ready commitment.

Because practice varies, treat a facility letter as a serious commercial document that can affect timing, costs and security exposure. Keywords to watch for in the document include: facility letter, letter of offer, facility agreement, conditions precedent, CPs, security, PPSR and guarantee.

Facility letter vs other loan documents

Understanding how a facility letter sits with other documents is essential for timing and negotiation. The table below summarises legal effect, timing and typical use.

Key points:

• A term sheet is usually high-level and indicative.
• A facility letter often records final terms but may reserve formal commitment until the facility agreement is signed and CPs satisfied.
• The facility agreement and executed security documents are the documents that typically create legal rights to draw funds and the lender's security.

Understanding key concepts like loan agreements and security deeds is important when reviewing facility letters.

Who are the parties and what are the typical types of facilities covered?

Parties commonly named:

• Borrower: company(ies) or trust(s) seeking finance.
• Lender(s): bank(s) or non-bank lenders; sometimes a syndicate.
• Agent: arranger or facility agent who administers the facility.
• Guarantors / Security providers: parent companies, directors, related entities, or trusts.

Typical facility types covered in a facility letter:

• Term loan (fixed or bullet repayments)
• Revolving credit facility (RCF) for working capital
• Overdraft / line of credit (including line of credit)
• Standby or performance guarantee facility
• Invoice finance / receivables facility
• Equipment or asset finance.

Key clauses to read first

When you open a facility letter, scan these clauses immediately:

• Facility amount and purpose — is the permitted use narrow or broad?
• Availability period / expiry — when must you draw or sign documents?
• Interest rate, margin and reset mechanics — base rate, margin, floor/ceil.
• Fees — establishment, commitment, utilisation, break or exit fees.
• Conditions precedent (CPs) — what must be completed before drawdown?
• Security/guarantees — what is required and when must security be granted?
• Events of default and acceleration — triggers and consequences.
• Binding statements — which provisions are expressly binding?
• Assignment and transfer rights — flexibility for lender transfers.
• Notices, governing law and dispute resolution.

Keep a printed copy of this checklist — a one-page summary speeds reviews in negotiation rounds.

Detailed clause guide

Facility amount and purpose

This clause states the maximum exposure and the allowed use of proceeds. Watch for:

• Broad purposes that allow lenders to characterise usage later.
• Tied purposes (e.g., refinancing specific debt) that restrict future flexibility.

Ask to narrow the permitted use or add a carve-out for permitted acquisitions.

Interest rate and margin; how/when it resets

Typically framed as: base rate (BBSY, BBR, bank bill swap rate) + margin. Watch for:

• Reset frequency (monthly, quarterly).
• Floors/ceiling and whether the lender can unilaterally change the base rate.
• Margin ratchets — margins that increase on downgrade or covenant breach.

Check market indices (e.g., RBA cash rate context via Reserve Bank data: https://www.rba.gov.au/statistics/cash-rate/) to understand sensitivity.

Fees

Fees can be charged upfront and ongoing. Common traps:

• Hidden ongoing fees (monitoring, agency).
• Break costs for early repayment — ensure formula is transparent.

Negotiate cap on fees and require itemised invoicing.

Conditions precedent and satisfaction mechanics

CPs list documents and actions required before drawdown (e.g., executed facility agreement, security lodged, ASIC searches, director certificates, no material adverse change). Watch for:

• Extensive or subjective CPs permitting lender delays.
• Unilateral satisfaction provisions allowing lender to determine satisfaction.

Seek objective satisfaction standards, time limits for CP satisfaction and lender obligation to act reasonably.

Drawdown mechanics and availability

Specifies notice period, minimum draw amounts, and drawdown windows. Issues include:

• Short lead times that hinder cashflow planning.
• Minimum utilisation limits or tranche timing.

Ensure clear mechanics and electronic/instruction procedures.

Security and guarantees; PPSR registration

Facility letters often require execution of security deeds, guarantees and prompt registration on the Personal Property Securities Register (PPSR). Practical points:

• Security may be all-assets or specific (bank accounts, receivables).
• Time to register on PPSR matters for priority — review registration steps: https://www.ppsr.gov.au/
• Check guarantee wording and whether it is limited by amount or time.

Representations and warranties

Borrower statements about status, capacity, compliance, financial statements. Red flags:

• General, continuing warranties with broad survival periods.
• Disclosure protocols — do you have to update or notify every time?

Aim for limited survival and materiality qualifiers.

Negative and affirmative covenants

Covenants restrict behaviour (no additional indebtedness, distributions, asset sales). Financial covenants may include leverage, interest cover ratios. Watch for:

• Tight reporting windows and non-financial operational covenants.
• Cure periods and waiver mechanics.

Events of default and remedies

Default can arise from payment defaults, breach of covenants, insolvency, cross-defaults. Accelerations may follow. Be cautious of:

• Cross-default clauses that accelerate for unrelated group defaults.
• Automatic acceleration vs. lender discretion.

Negotiate notice/cure periods and carve-outs for technical breaches.

Termination, expiry and cancellation rights

Check lender rights to cancel undrawn facilities and whether cancellation can happen without cause or with short notice. Ask for:

• Defined causes for cancellation.
• Reasonable notice (e.g., 30 days) for non-cause termination.

Assignment and transfer

Lenders often reserve rights to transfer exposures. Ensure:

• Borrower consent required only where an assignment adversely affects them.
• Confidentiality protections on new lenders.

Notices, governing law and dispute resolution

Confirm governing law (refer to Corporations Act obligations where relevant: https://www.legislation.gov.au/Series/C2004A00818) and practical dispute resolution pathways. Specify addresses and acceptable transmission methods.

Common red flags and negotiable points

• Broad binding language in a facility letter creating unintended obligations. Ask for clarity on which provisions are binding.
• Subjective CPs or lender discretion to determine satisfaction — replace with objective standards or timelines.
• All-assets omnibus security creating cross-security across unrelated entities. Limit to business-relevant assets.
• Cross-default and cross-acceleration sweeping in minor group issues — tighten thresholds and materiality limits.
• Automatic acceleration on technical or immaterial breaches — request cure periods.
• Unlimited guarantees from individuals or related companies — cap amounts or timeframes.
• Excessive fees or undefined break cost formulas — require transparency and caps.
• PPSR timing traps — ensure registration timing is defined to protect priority.

Negotiation tips:

• Convert subjective CPs to objective deliverables or time-limited lender approvals.
• Add a lender obligation to use reasonable endeavours to complete CPs within a specified period.
• Limit guarantee/surety obligations by reference to a specific facility or cap.
• Introduce materiality thresholds for representations and defaults.

Step-by-step: What to do when you receive a facility letter

1. Initial triage (24–48 hours):
   • Read binding clause paragraph and CP summary.
   • Run the quick checklist (Facility amount, expiry, fees, security).

2. Commercial review:
   • Confirm pricing, availability window and matching to cashflow needs.
   • Compare to the earlier term sheet.

3. Legal and tax review:
   • Engage your lawyer for detailed review of CPs, security and default mechanics.
   • Ask tax adviser about stamp duty risks on security or guarantees (state rules vary).

4. Board or credit committee sign-off:
   • Prepare a short memo summarising key obligations and risks.

5. Negotiate:
   • Propose redlines on CPs, fees, guarantees, and acceleration clauses.
   • Track binding clauses to ensure no unintended obligations.

6. Satisfy CPs:
   • Coordinate document execution, ASIC searches, director certificates and PPSR registrations.

7. Execute facility agreement & security:
   • Ensure execution aligns with CP timelines and lender expectations.

8. Drawdown:
   • Follow drawdown mechanics and keep records of notices and receipts.

Effective negotiation of key terms early on can save significant costs and headaches later.

Example wording and redline tips

Example clause — interest margin (original):

"Interest will be the base rate plus a margin of 2.00% per annum. The Lender may vary the base rate at its absolute discretion."

Suggested redline:

"Interest will be the base rate (BBSY) plus a margin of 2.00% per annum. Any change to the base rate will be on a uniform basis across comparable facilities and notified to the Borrower not less than 5 Business Days prior to implementation."

Example clause — CP satisfaction (original):

"The Lender may in its absolute discretion determine whether a condition precedent has been satisfied."

Suggested redline:

"Each condition precedent must be evidenced by a certificate from the Borrower and, where relevant, documents specified in Schedule X. The Lender must notify the Borrower within 10 Business Days of receipt if any CP is incomplete; failure to notify will be deemed acceptance."

Example covenant — limited (original):

"The Borrower must not incur any further indebtedness without the Lender's consent."

Suggested redline:

"The Borrower must not incur indebtedness greater than $100,000 except for trade creditors in the ordinary course of business or facilities disclosed to the Lender."

All examples are for illustration only — have your lawyer tailor redlines to your deal.

FAQ

Key takeaways

Treat a facility letter as commercially important even if parts are non-binding. Check which clauses are expressly binding, focus first on conditions precedent, security, fees and expiry/availability periods to avoid timing and priority surprises, and negotiate objective CPs with reasonable notice/cure periods and caps on guarantees and fees. Use the quick checklist and involve legal, tax and board stakeholders early to streamline drawdown and protect your business interests.

Further reading

• Corporations Act 2001: https://www.legislation.gov.au/Series/C2004A00818
• PPSR registration guide: https://www.ppsr.gov.au/
• ASIC guidance: https://asic.gov.au/
• Reserve Bank cash rate data: https://www.rba.gov.au/statistics/cash-rate/

This article is general information only and is not legal, tax or financial advice.