What is an incremental facility?
An incremental facility — often called an accordion — is a provision in a credit agreement that lets the borrower raise additional debt later, on top of the existing loans, without renegotiating the whole agreement. The capacity to expand is built in at the outset; the borrower exercises it when it needs more capital.
It is a flexibility feature, not committed money. Unlike a delayed draw term loan, where lenders have already committed the capital, an incremental facility merely permits the borrower to seek new commitments later — from existing or new lenders — up to a defined amount and within agreed conditions. The borrower still has to find lenders willing to fund it.
The size of an accordion is governed by a mix of a fixed dollar amount and a leverage-based ratio, so capacity grows as the business grows. New incremental debt typically shares the existing collateral and ranks alongside the original loans, which is why the terms it can be raised on — including pricing protection for existing lenders — are negotiated carefully up front.
How an incremental facility actually works
The accordion is negotiated at signing and drawn on later.
- Set the capacity. The credit agreement defines how much incremental debt can be raised — typically a fixed amount plus an amount that grows with the business under a leverage test.
- Set the conditions. Terms govern ranking, maturity, and use of proceeds, and often require the new debt to sit pari passu with or junior to existing loans.
- Find commitments. When the borrower wants to draw, it solicits commitments from existing or new lenders — the capacity is permission, not pre-funded money.
- Protect existing lenders. A most-favored-nation clause may require the borrower to lift existing pricing if the new incremental debt prices materially higher, protecting current lenders from being subordinated on yield.