Growing a startup often means juggling cash flow, supplier invoices, wages, stock, and the occasional unexpected expense that pops up at the worst possible time.
If you’re looking for funding to keep momentum (or to take your business to the next stage), you’ll likely hear the term facility agreement. This is one of the most common legal documents used when a lender provides a business with access to finance - whether that’s a one-off loan, an ongoing line of credit, or something more tailored.
A facility agreement can be a powerful tool for growth, but it can also create real risk if you sign without understanding what you’re committing to. The good news is that once you know the moving parts, these agreements become much easier to assess and negotiate.
Below, we break down what a facility agreement is, when you’ll need one, the terms that matter most, and how to protect your startup or small business before you sign.
What Is A Facility Agreement (And Why Does It Matter)?
A facility agreement is a contract between a lender and a borrower that sets out the terms on which the lender makes finance available. In plain English, it’s the “rulebook” for how your business can access funding and what you must do in return.
Facility agreements are commonly used for business lending because they can be structured in different ways depending on what you need - for example:
- Term loan facilities (you borrow a set amount and repay over a fixed period)
- Revolving facilities (you can draw down, repay, and draw down again - similar to a business line of credit)
- Overdraft facilities (your account can go into negative up to an agreed limit)
- Equipment or asset finance facilities (finance tied to specific business assets)
- Multiple facilities under one umbrella (e.g. a term loan plus a working capital facility)
What makes a facility agreement especially important is that it often connects to other legal documents that create security and enforcement rights for the lender. For example, the lender may require a general security agreement, which can give them rights over your business assets if you default.
This is why it’s worth slowing down before signing. A facility agreement isn’t just about the interest rate - it’s about control, reporting, restrictions, and what happens if something goes wrong.
When Do Startups And Small Businesses Use A Facility Agreement?
You might come across a facility agreement at different points in your business journey. Some common scenarios include:
- Working capital pressure: you’re growing quickly, but customer payments lag behind payroll and supplier bills.
- Buying equipment or vehicles: you need assets now and want to spread the cost over time.
- Stock or inventory funding: you want to purchase stock in bulk (often to secure better margins).
- Expansion: you’re opening a second site, hiring more staff, or investing in a product build.
- Bridging finance: you need short-term funding while waiting on a longer capital raise or receivables.
It’s also common to see facility agreements linked to a “package” of documents. For example, you might have:
- a facility agreement (main contract),
- a security document (like a general security agreement),
- director guarantees, and
- sometimes additional documents like mortgages or specific asset security documents.
If the lender is taking security, they may also register it on the PPSR (Personal Property Securities Register). In practice, that usually means your lender will want the right to register a security interest to protect their position against other creditors.
None of this automatically means “don’t do it”. It just means you should understand how the documents work together and what that means for your business in the real world.
Key Terms In A Facility Agreement You Should Understand Before Signing
Facility agreements can be dense, and they often look intimidating at first glance. The trick is knowing which sections have the biggest commercial and legal impact on your day-to-day operations and your downside risk.
Here are the key terms we typically recommend small businesses focus on.
1. Facility Type, Limit And Purpose
This section explains what you’re being offered and how you’re allowed to use it.
- Facility limit: the maximum amount you can draw.
- Purpose: what the money can be used for (some lenders restrict this tightly).
- Availability period: when you can draw down and for how long.
If your business model changes quickly (as many startups do), a tightly drafted “purpose” clause can become a problem later if your spending doesn’t fit within the stated purpose.
2. Interest, Fees And Default Interest
Most founders compare interest rates - but fees can change the real cost significantly.
Watch for:
- Establishment fees and line fees (ongoing fees for keeping the facility available, even if you don’t use it)
- Review fees (fees charged each time the lender reassesses the facility)
- Default interest (a higher interest rate that applies after a default event)
It’s worth modelling the “all-in” cost based on realistic use of the facility, not just the headline rate.
3. Repayment Terms And Mandatory Prepayments
A facility agreement will set out when and how you must repay. Depending on the facility, repayments may be:
- principal and interest on a schedule,
- interest-only for a period (then principal later), or
- repayable “on demand” (common in some overdrafts).
Also check for mandatory prepayment clauses. These can require you to repay early if certain events happen (for example, you sell an asset, receive insurance proceeds, or raise capital). For a fast-moving startup, this can affect how you plan fundraising and cash flow.
4. Conditions Precedent (What You Must Provide Before Funding)
Most lenders won’t let you draw down until you provide certain items, often called conditions precedent. Examples might include:
- evidence of your company structure and signatories,
- board or shareholder approvals,
- security documents signed and delivered,
- insurance certificates, and
- financial statements or forecasts.
This is usually where timing issues show up. If you need funds by a particular date, it’s important to confirm you can practically satisfy the conditions in time.
Facility agreements often require you to keep the lender updated. This may include providing:
- monthly or quarterly management accounts,
- annual financial statements,
- budgets and forecasts, and
- notice of certain events (like major litigation, tax issues, or key contract terminations).
These are often reasonable, but they can create a real admin burden for lean teams. It’s worth making sure the reporting obligations match your operational reality.
6. Financial Covenants
Financial covenants are promises about your financial position (and they can be strict). Examples include minimum cash balance requirements or ratios tied to revenue, profitability, or leverage.
The risk here is that you can be doing “fine” operationally but still breach a covenant due to timing, seasonal revenue dips, or one-off costs.
If you’re early-stage and your numbers can swing month to month, this section deserves careful attention - and often negotiation.
7. Events Of Default
This is the part that explains when the lender can take enforcement action. Events of default commonly include:
- non-payment,
- insolvency events,
- breach of covenant,
- misrepresentation,
- cross-default (defaulting under another agreement triggers default here), and
- unapproved changes in ownership or management.
Even if you expect smooth sailing, you should understand what the “trip wires” are - and what the lender can do if an event of default occurs (for example, demand immediate repayment, cancel undrawn commitments, or enforce security).
8. Security And Guarantees
Many facility agreements are “secured”. That means if your business can’t repay, the lender may have rights against business assets (and sometimes personal assets if there are guarantees).
Security can be broad (covering most assets) or narrow (limited to a specific asset), and the security document will usually spell out what is covered and how enforcement works. Guarantees might also be required from:
- directors personally,
- a holding company, or
- related entities.
This is often where risk becomes personal. It’s also where careful drafting can make a meaningful difference - for example, by limiting the scope of security, narrowing guarantee exposure, or clarifying enforcement steps.
How Do You Put A Facility Agreement In Place (Step-By-Step)?
If you’re about to enter a facility agreement, here’s a practical way to approach it so you don’t get caught by surprises later.
1. Get Clear On What You Actually Need The Facility For
Start with the business question: what problem is this funding solving?
- Is it a short-term cash flow gap?
- Is it a longer-term expansion plan?
- Is it funding an asset that will generate revenue?
Being clear on this helps you choose the right facility type and makes it easier to spot terms that don’t align with your goals (like short repayment periods for longer-term projects).
2. Map The Facility Agreement Against Other Business Documents
Facility agreements don’t exist in isolation. If your business has multiple founders or investors, your internal governance documents can matter for signing and ongoing compliance.
For example, your Shareholders Agreement may require shareholder consent before taking on debt or granting security.
Similarly, your Company Constitution may set out who can sign documents and how decisions are approved.
It’s much easier to address these issues upfront than to scramble for approvals when settlement is due.
3. Review The Facility Agreement Like A Risk Checklist (Not Just A Rate Sheet)
When you’re scanning the terms, focus on:
- Commercial flexibility: can you operate, pivot, raise funds, and spend as needed?
- Control points: where does the lender get decision-making influence (consents, reporting, covenants)?
- Downside risk: what triggers default and what happens next?
This is also a good time to confirm the “basics” are right - because enforceability matters. If you want a refresher on the foundations, what makes a contract legally binding is a useful framework when you’re dealing with high-stakes agreements.
4. Negotiate The Parts That Will Affect Your Real-World Operations
Not every clause is equally important for every business.
For many startups and small businesses, the most negotiation-sensitive areas tend to be:
- financial covenants (and how they are tested)
- events of default (and cure periods to fix breaches)
- information undertakings (what you can realistically report)
- limitations on additional debt, fundraising, or asset sales
- security scope and guarantee exposure
Even small wording changes can significantly shift risk. You’ll often want the agreement to reflect how your business actually runs - not a generic “ideal borrower” template.
5. Put The Right Supporting Agreements In Place
Depending on how the facility is structured, you may also need other finance documents alongside it, such as a Loan Agreement (particularly in private lending situations, or where the document set is simplified).
If there are liability caps or allocation of risk provisions in related contracts connected to the funded project, it can also be helpful to understand how these clauses work in practice - limitation of liability clauses are a common example that can impact who carries the financial downside if something goes wrong.
Common Facility Agreement Pitfalls (And How To Avoid Them)
Most facility agreement problems don’t happen because founders are careless. They happen because founders are busy, moving quickly, and trying to solve an urgent cash flow need.
Here are some common issues we see - and how you can reduce the risk.
Signing Without Understanding “Hidden” Triggers
Events of default and covenants can create default risk even when you’re not “in trouble” in a practical sense.
What to do: identify the clauses that can be breached accidentally (ratios, reporting dates, cross-default) and look for cure periods or more practical thresholds.
Agreeing To Overly Broad Security
A broad security package can make refinancing harder later, and it can also limit what you can offer to future lenders or investors.
What to do: clarify what assets are covered, how the security operates in practice under the relevant security document, and whether there are carve-outs you need for normal trading.
Not Considering Future Fundraising Or Restructures
Startups often evolve quickly: new investors, new cap tables, new entities, or a restructure for tax or operational reasons.
Some facility agreements restrict changes in ownership, group structure, or issuing new shares without lender consent.
What to do: if fundraising is likely, flag it early and ensure the agreement won’t block your next step.
Overcommitting On Reporting
Many founders agree to reporting requirements thinking “we’ll figure it out later”. But reporting obligations are often ongoing and time-sensitive, and missing them can technically be a breach.
What to do: make sure reporting timelines match what your finance function can deliver, especially if you don’t yet have an in-house CFO.
Forgetting About Broader Operational Compliance
This one surprises people: even though a facility agreement is a finance document, it may still include “general compliance” undertakings requiring you to comply with laws that apply to your business (for example, workplace, tax, and regulatory obligations). Depending on the lender and the industry, there may also be requirements around insurance and risk management processes.
If you collect personal information online, having a compliant Privacy Policy is still an important part of your overall risk management toolkit - and it’s something investors and some lenders may expect you to have in place.
Key Takeaways
- A facility agreement is the main contract that sets out how your business can access finance, what it costs, and what rules you must follow while the facility is in place.
- Don’t focus only on the interest rate - key clauses like financial covenants, events of default, reporting obligations, and security often have the biggest real-world impact.
- Many facility agreements are linked to security documents (including PPSR registrations), which can affect your business assets and future fundraising flexibility.
- Your internal governance documents (like your Constitution and Shareholders Agreement) may require approvals before you take on debt or grant security.
- Common pitfalls include accidentally breaching covenants, agreeing to overly broad security, and signing terms that restrict future investment or restructuring.
- Getting legal help early can make negotiations smoother, clarify risk, and help you sign with confidence.
This article is general information only and does not constitute legal advice. For advice tailored to your circumstances, it’s best to speak with a lawyer.
If you’d like help reviewing or negotiating a facility agreement for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
