EXPM:HRTFF - Post by User
Comment by
Specificon Aug 31, 2020 3:36pm
207 Views
Post# 31480688
RE:NEW NR
RE:NEW NR What Is an Accordion Feature?
An accordion feature is an option that a company can buy that gives it the right to increase its line of credit (or similar type of liability) with a lender. Companies typically purchase an accordion feature in anticipation of the need for more working capital for possible expansion opportunities. If such opportunities do to materialize, the option can be left to expire without penalty.
KEY TAKEAWAYS
- An accordion feature in a line of credit allows a business to increase that line of credit if necessary, often to obtain more working capital or emergency cash.
- The accordion feature is an added option that requires the business to pay a premium for the right to use it.
- If the feature is not exercised, the company faces no penalty, but will lose out what it paid to purchase the option.
Understanding Accordion Features
The accordion feature creates a positive benefit for all parties involved in a loan agreement. Loan terms with an accordion feature are well suited for situations where a business shows great potential for accelerated growth, while at the same time there are indications of risks from uncertainty due to factors for which the business has no control. A lender is able to somewhat mitigate the risk of the noted uncertainty by increasing a line of credit incrementally, with each increment made contingent on the future realization by the business of specific predetermined expectations, and an increased certainty of the aforementioned uncontrollable factors. All the expectations are negotiated and a pro forma plan is agreed upon by all parties.