What Is a Revolving Loan Facility?
A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again. In contrast, a term loan provides a borrower with funds followed by a fixed payment schedule.
Key Takeaways
- A revolving loan facility provides loans to borrowers with a great deal of flexibility in terms of repayments and re-borrowing.
- The interest rate on a revolving loan facility is typically that of a variable line of credit, rather than a fixed rate.
- A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations, including meeting payroll and payables.
How a Revolving Loan Facility Works
A revolving loan facility is typically a variable line of credit used by public and private businesses. The line is variable because the interest rate on the credit line can fluctuate. In other words, if interest rates rise in the credit markets, a bank might increase the rate on a variable-rate loan. The rate is often higher than rates charged on other loans and changes with the prime rate or another market indicator. The financial institution typically charges a fee for extending the loan.
Criteria for approval of the loan depends on the stage, size, and industry in which the business operates. The financial institution typically examines the company’s financial statements, including the income statement, statement of cash flows, and balance sheet when deciding whether the business can repay a debt. The odds of the loan getting approved increases if a company can demonstrate steady income, strong cash reserves, and a good credit score. The balance on a revolving loan facility may move between zero and the maximum approved value.
How Do Businesses Use a Revolving Loan Facility?
A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations. A revolving line is especially helpful during times of revenue fluctuations, since bills and unexpected expenses can be paid by drawing from the loan. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance.
The financial institution may review the revolving loan facility annually. If a company’s revenue shrinks, the institution may decide to lower the maximum amount of the loan. Therefore, it is important for the business owner to discuss the company’s circ*mstances with the financial institution to avoid a reduction in or termination of the loan.
A revolving loan facility provides a variable line of credit that allows people or businesses great flexibility with the funds they are borrowing.
Example of a Revolving Loan Facility
Supreme Packaging secures a revolving loan facility for $500,000. The company uses the credit line for covering payroll as it waits for accounts receivable payments. Although the business uses up to $250,000 of the revolving loan facility each month, it pays off most of the balance and monitors how much available credit remains. Because another company signed a $500,000 contract for Supreme Packaging to package its products for the next five years, the packaging company is using $200,000 of its revolving loan facility for purchasing the required machinery.
How Long Do You Have to Repay a Revolving Loan Facility?
Unlike a term loan with fixed payments, a revolving loan facility has no established term. Money is withdrawn by the company, reducing the amount available to borrow. It is then paid back, replenishing the line of credit.
Are all Revolving Loan Facilities for Businesses?
For the purposes of this article, yes, they are limited to businesses. Home equity lines of credit or personal lines of credit operate on the same principles for personal use.
Do You Pay Interest on a Revolving Loan Facility?
Yes. A revolving loan facility is a loan, just like any other term loan. The difference is that instead of receiving borrowed money in a lump sum, the money can be used as needed, repaid, and then used again.
The Bottom Line
For businesses with fluctuating income, a revolving loan facility can be a great option for meeting payroll or covering unforeseen expenses. Establishing a revolving loan facility with your bank could be a wise move for your business.
FAQs
Revolving credit is a line of credit that remains open even as you make payments. You can access money up to a preset amount, known as the credit limit. When you pay down a balance on the revolving credit, that money is once again available for use, minus the interest charges and any fees.
How does a revolver loan work? ›
A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again.
How does a RCF work? ›
A revolving credit facility is a type of credit that enables you to withdraw money, use it to fund your business, repay it and then withdraw it again when you need it. It's one of many flexible funding solutions on the alternative finance market today.
What is revolving credit select the best answer? ›
With revolving credit, the borrower is given a credit limit that they can borrow against repeatedly. While they may be required to make minimum monthly payments, it has no fixed end date for repayment in full. Credit cards and credit lines are examples of revolving credit.
What is a revolving loan facility? ›
A revolving credit facility is a line of credit that is arranged between a bank and a business. It comes with an established maximum amount, and the business can access the funds at any time when needed. The other names for a revolving credit facility are operating line, bank line, or, simply, a revolver.
What is a revolving loan example? ›
Revolving credit lets you borrow money up to a maximum credit limit, pay it back over time and borrow again as needed. Credit cards, home equity lines of credit and personal lines of credit are common types of revolving credit.
How does a revolver work step by step? ›
When the trigger lever is pushed all the way back, it releases the hammer. The compressed spring drives the hammer forward. The firing pin on the hammer extends through the body of the gun and hits the primer. The primer explodes, igniting the propellant.
How is revolver interest calculated? ›
From there, the revolving line of credit interest formula is the principal balance multiplied by the interest rate, multiplied by the number of days in a given month. This number is then divided by 365 to determine the interest you'll pay on your revolving line of credit.
What is the difference between a revolver and a loan? ›
Term loans are different from revolver loans in that they provide software companies with a lump sum of money that must be repaid over a predetermined period, along with interest. These loans are commonly used for significant or long-term investments.
What is the purpose of a revolving credit facility? ›
Revolving credit facilities are a type of committed credit facility which allow the borrower to borrow on an ongoing basis while repaying the balance in regular payments. Each repayment of the loan, minus interest and fees, replenishes the amount available to the borrower.
The formula to calculate interest on a revolving loan is the balance multiplied by the interest rate, multiplied by the number of days in a given month, divided by 365. In a month with 31 days, you'll multiply by 31 before dividing by 365.
What is the difference between a loan and a RCF? ›
A term loan involves borrowing a fixed amount of money, repaying this sum with interest over a specified term. Conversely, a revolving credit facility operates similarly to a credit card. This affords businesses a credit limit that they can borrow against, repay and borrow again.
What are 3 examples of revolving credit? ›
Revolving credit examples
Common types of revolving credit accounts include credit cards, PLOCs and HELOCs. Take a closer look at each. Credit cards: Credit cards can be used to make everyday purchases or to pay for unexpected expenses.
What is the most common revolving credit? ›
Two of the most common types of revolving credit come in the form of credit cards and personal lines of credit.
Is a revolving credit facility good? ›
It's popular among businesses that need to boost their working capital, so you might use it for short-term financing that you plan to pay off quickly. A revolving credit line is a bit like a flexible, open-ended loan. You can borrow money, pay it back, borrow some more, and so on, for the agreed duration of the term.
What are the disadvantages of a revolving loan? ›
Con: Higher Interest Rates
Although the interest rates on a revolving line of credit are usually lower than those on other types of loans, they are still higher than the rates you would get if you paid cash. This means that you will end up paying more money in the long run if you use this type of loan.
What is better a revolving loan or personal loan? ›
Personal loans are best suited for larger purchases and expenses. On the other hand, revolving credit is suitable for small expenses, that can be repaid over a shorter period. Personal loans come with fixed interest rates, which means that you know exactly what you will be paying and for how long.
Do revolving accounts hurt your credit? ›
Revolving credit, particularly credit cards, can certainly hurt your credit score if not used wisely. However, having credit cards can be great for your score if you pay attention to your credit utilization and credit mix while building a positive credit history.
Are revolving loans good? ›
Revolving credit, such as a credit card, makes sense when you plan to repay the amount borrowed by the due date. It can also make sense if you earn points or miles, or get cash back. However, interest is accrued on any balance carried over each month and can be higher than with installment credit.
