What Is an Accordion Function?
An accordion characteristic is an possibility that an organization can purchase that provides it the suitable to extend its line of credit (or comparable sort of legal responsibility) with a lender. Corporations usually buy an accordion characteristic in anticipation of the necessity for extra working capital for attainable enlargement alternatives. If such alternatives do to materialize, the choice will be left to run out with out penalty.
- An accordion characteristic in a line of credit score permits a enterprise to extend that line of credit score if crucial, usually to acquire extra working capital or emergency money.
- The accordion characteristic is an added possibility that requires the enterprise to pay a premium for the suitable to make use of it.
- If the characteristic shouldn’t be exercised, the corporate faces no penalty, however will lose out what it paid to buy the choice.
Understanding Accordion Options
The accordion characteristic creates a constructive profit for all events concerned in a mortgage settlement. Mortgage phrases with an accordion characteristic are effectively fitted to conditions the place a enterprise reveals nice potential for accelerated development, whereas on the similar time there are indications of dangers from uncertainty because of elements for which the enterprise has no management. A lender is ready to considerably mitigate the danger of the famous uncertainty by rising a line of credit score incrementally, with every increment made contingent on the longer term realization by the enterprise of particular predetermined expectations, and an elevated certainty of the aforementioned uncontrollable elements. All of the expectations are negotiated and a pro forma plan is agreed upon by all events.
For companies, most notably a enterprise with a novel and progressive concept or product, the accordion characteristic is useful in a number of methods. First, it permits the enterprise to place forth extra favorable phrases for lenders. This serves to draw extra lenders to companies looking for credit score that may in any other case be deemed as too dangerous. By making further credit score will increase contingent on the enterprise exceeding professional forma expectations, the lenders focus extra on the chance than the danger. Second, the phrases for the complete line of credit score, together with all of the incremental will increase, are negotiated on the onset. Thus, if and when a credit score improve takes place, all of the phrases are predetermined, and the credit score improve will be expedited. That is particularly essential for the brand new enterprise that has exceeded its expectations, and fast enlargement could also be warranted to capitalize on untapped markets earlier than rivals seize the chance. Taking time to rehash credit score phrases could also be counterproductive.
One other essential attribute of the accordion characteristic that advantages the enterprise is the credit score will increase are non-obligatory. Consequently, if the enterprise can increase with out incurring further debt, it will possibly make that call.
Instance of an Accordion Function
For instance, suppose firm ABC has established a $100,000 line of credit score with the Financial institution of XYZ. Firm ABC has additionally bought an “accordion characteristic” that lets it improve its complete debt dedication of $100,000 to $150,000 as a result of Firm ABC believes it’s going to want an extra $50,000 if it decides so as to add a brand new gross sales division. This time period’s origin is derived from how an accordion will be pulled and stretched in a fashion that lengthens its complete dimension.