Debt terms defined

How to read a facility agreement

Sort the document into three questions and most of its length becomes navigable.

What does it cost? Interest rate and basis, arrangement and commitment fees, early settlement penalties, and any PIK accrual. Ask for an all-in cost over the expected life as a single number — headline rates routinely understate it.

What does it take? Security granted, sureties given, and what those encumbrances prevent the business doing later. A general notarial bond can make a subsequent asset finance facility impossible, a cost that appears nowhere in the pricing.

What breaks it? Covenants and their headroom, reporting obligations and who will actually produce them, default events including cross-default, cure periods, and the lender's rights once default is declared.

Borrowers spend most of their negotiating effort on the first question. The second and third decide what happens in a bad year, which is the year the document was written for.

Terms worth extra attention in African facilities

Currency. Foreign-denominated debt against local-currency revenue introduces exposure that can dwarf the interest rate. A facility that looked cheap in dollars can become the most expensive thing on the balance sheet after a depreciation, and hedging costs must be counted as part of the price rather than treated separately.

Surety scope. Unlimited, joint-and-several sureties covering all present and future obligations are common and are materially different from a capped, releasable surety. The difference rarely appears in the discussion.

Conditions precedent. The list of things required before money is released. Where these depend on registries, regulators or third parties, they can add months, and businesses regularly run out of runway between signature and drawdown. Ask what is genuinely within your control and what is not.

Reporting. Development finance and blended facilities carry impact and compliance reporting for the life of the facility. That is an operational commitment requiring a named owner inside the business, not a one-off condition.

Index of terms

Acceleration

A lender's right, on default, to demand immediate repayment of the entire outstanding balance rather than continuing the agreed schedule.

Amortisation

The repayment of a loan's principal in instalments over its term, as distinct from interest-only structures where the principal is settled at the end.

Asset finance

Borrowing secured against the specific asset it funds — vehicles, plant or equipment — so the asset provides its own security.

Balloon payment

A large final repayment at the end of a facility, used to keep periodic instalments low. It requires refinancing or a cash reserve to meet.

Bullet repayment

A structure where no principal is repaid during the term and the full amount falls due at maturity.

Cession of book debts

Security giving a lender first claim over money owed to the business by its customers.

Covenant

A promise in a facility agreement about how the business will perform or behave. Financial covenants are tested against numbers; negative covenants forbid specified actions.

Cross-default

A clause making default under any other facility a default under this one, so a problem with one lender can trigger consequences with all of them.

Cure period

A defined window in which a borrower may remedy a breach before the lender's rights on default become exercisable.

Debt service cover ratio (DSCR)

Cash available to service debt divided by the payments due in the period. Usually the first number a lender calculates and often the last that matters.

Documentary collection

A trade mechanism where banks handle shipping documents against payment but do not guarantee it — cheaper and lighter than a letter of credit.

Drawdown

The act of taking money under an agreed facility, which may occur in tranches rather than all at once.

Facility

An agreed borrowing arrangement, which may be a term loan, a revolving line, or a transaction-specific limit.

Factoring

The sale of invoices to a funder who then collects from the customers directly. Cheaper than discounting and visible to those customers.

Gearing

The ratio of debt to shareholder funds. A common covenant and a shorthand for how much risk sits in the capital structure.

Guarantee

An undertaking to pay if a party fails to perform. Performance bonds and bid bonds are common forms, often required to access contracts at all.

Invoice discounting

An advance against unpaid invoices while the business continues to collect from its own customers, usually confidentially.

Letter of credit

A bank's undertaking to pay a seller once specified documents are presented, replacing trust between counterparties who do not know each other.

Material adverse change

A clause allowing a lender to act if the business's circumstances deteriorate significantly, even absent any specific breach.

Mezzanine finance

Capital ranking between senior debt and equity, priced above bank lending and usually carrying warrants or an equity kicker.

Negative pledge

A promise not to grant security to any other lender, protecting the existing lender's position at the cost of future flexibility.

Notarial bond

Security over movable property such as equipment and vehicles, which may be general over all movables or specific to named assets.

PIK interest

Payment in kind — interest added to the loan balance instead of paid in cash, preserving cash flow but compounding the amount ultimately due.

Purchase order funding

Capital advanced against a confirmed order so a business can fund the stock or materials needed to fulfil it.

Recourse

Whether the funder can reclaim from the business if a customer fails to pay. Non-recourse shifts that risk to the funder at a higher price.

Revolving credit facility

A limit that can be drawn, repaid and drawn again, suited to fluctuating working capital rather than a one-off need.

Senior debt

Borrowing ranking ahead of other creditors and of equity for repayment, usually secured and carrying the lowest cost of external capital.

Subordinated debt

Borrowing ranking behind senior debt for repayment, accepting more risk and priced accordingly.

Surety

A personal undertaking by an owner to pay the business's debt if it does not, extending the lender's claim to personal assets.

Warrant

A right to acquire shares at a set price, often attached to mezzanine lending so the lender participates in the upside.

Working capital

The capital funding day-to-day operations — inventory, debtors and creditors — as distinct from capital expenditure on long-term assets.