Posted in Finance, Accounting and Economics Terms, Total Reads: 210
Definition: Debt Accordion
A debt accordion allows a company to increase its loan term or amount with a financial lender. The debt accordion is generally available to the borrowers within the existing confines of a credit agreement. There has to be no event of default for the borrower to use this facility. Generally these facilities have a cap but some lenders also provide for unlimited debt accordion. It also has a maximum number of times the facility can be used.
An accordion is a type of option that provides a company with the right to increase its line of credit or a similar kind of liability with a financial lender. A line of credit is the maximum amount of loan extended to a borrower by a lender or financial institution, most commonly banks. It is bought by a company which has further expansion possibilities. The accordion feature provides the company with the necessary working capital required to expand its operations.
For example: a company has a $60000 line of credit with a financial lender. If a company used the accordion feature to increase its line of credit from $60000 to $80000, it has further expansion or development possibilities.
A company uses its debt accordion feature during the time when it is unable to make its payments. It generally takes into account the commercial loans. The shareholders may share some of the debt liabilities rather than seeing a company go bankrupt due to rough times. The debt accordion feature helps a company to successfully sail through testing times as well as take into account the various options of development and expansion facilities. It also provides more liquidity in the line of credit by helping the borrowers to get the required amount of capital. Factors like events of default and trust issue may make the lenders to not extend this feature to the borrowers.