Accordion Feature

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 with a lender. Companies commonly purchase an accordion feature in anticipation of the requirement for more working capital for conceivable expansion opportunities. In the event that such opportunities don't emerge, the option can be left to lapse without penalty.

Understanding Accordion Features

The accordion feature makes a benefit for all gatherings engaged with a loan agreement. Loan terms with an accordion feature are appropriate for circumstances where a business shows great potential for accelerated growth, even however there are indications of risks of vulnerability due to factors for which the business has no control.

A lender can moderate the risk of vulnerability by expanding a credit extension incrementally, every augmentation contingent on the future realization by the business of foreordained expectations. Every one of the expectations are negotiated and a pro forma plan is agreed upon by all gatherings.

For a business with a novel and imaginative thought or product, the accordion feature is beneficial in more than one way. It permits the business to tempt better terms from lenders, and draw in additional lenders to businesses seeking credit that sounds considered as too risky. By making extra credit increases contingent on the business surpassing pro forma expectations, the lenders center more around the opportunity than the risk.

Moreover, the terms for the credit extension, including every one of the incremental increases, are negotiated at the beginning. In the event that and when a credit increase happens, every one of the terms have been foreordained, and the credit increase can be expedited. This is essential for another business that has surpassed its expectations, and fast expansion is justified to capitalize on an opportunity.

The accordion feature benefits the business as credit increases are optional.

Illustration of an Accordion Feature

Assume company ABC has laid out a $100,000 credit extension with the Bank of XYZ. Company ABC has likewise purchased an "accordion feature" that allows it to increase its total debt commitment from $100,000 to $150,000 if and when Company ABC accepts it will require an extra $50,000 to add another sales division. On the off chance that the company can grow with the extra debt, the accordion feature is optional and can be left to terminate without penalty

Features

• In the event that the feature isn't worked out, the option can be left to terminate without penalty.
• An accordion feature in a credit extension permits a business to increase its credit extension if fundamental, frequently to get really working capital or emergency cash.
• The accordion feature is an additional option that requires the business to pay a premium for the right to utilize it.