What is a Revolving Credit Facility? | LegalVision UK (2024)

If a bank agrees to provide your business with a revolving credit facility (‘RCF’), the terms and conditions of the RCF will be contained in the loan or facility agreement. This article will explain the key terms of an RCF and highlight some terms and conditions that are unique to term facilities.

What Are Revolving Credit Facilities?

An RCF lets your business borrow up to a maximum amount the bank is willing to loan. This maximum amount will be contained in a term called The Facility’. Generally, the bank does not obligate you to borrow the total amount.

An RCF differs from other loans because you can redraw the money you have paid back.

An RCF will be divided into different tranches. Tranches are different amounts available to your business with corresponding interest rates.

For example, the bank may offer you a £1m RCF that matures in two years. The first tranche might be £250,000 at 3.5%. The second tranche might be £250,000k at £4%, and so on. However, the balance on the RCF must be zero by the maturity date. Hence, you can borrow up to the total £1m, repay some or all of it, and then redraw the repaid amount until the loan matures.

As with most bank loans, an RCF is usually secured. This means the bank can take your business’ property and sell it under certain conditions called events of default. RCFs are usually also committed facilities. This means that when the bank offers the loan, they will have to honour the total amount they promised to lend your business.

Benefits of an RCF

An RCF is similar to a term loan because you can borrow up to the maximum amount the bank is willing to commit. However, unlike a term loan, your business can later re-borrow the amount it has repaid. In this sense, it has features of an overdraft facility and a term loan.

Additionally, you can minimise your interest payments because the RCF is divided into different tranches. You can do this by only borrowing as much as you need and repaying it according to your business cash flow.

Disadvantages of an RCF

Banks tend to loan RCFs to businesses for general cash flow purposes and not for significant one-off expenses, such as purchasing a new machine. As a result, the terms of the loan will impose certain restrictions on how you can utilise the RCF. These include:

• how much notice you must provide the bank before you intend to utilise the loan;
• the minimum and maximum periods you are allowed to borrow for;
• the maximum number of tranches that can be drawn at once; and
• terms dictating the timing and frequency of repayments.

Terms Unique to RCFs

The terms listed above are unique to RCFs. Hence, we will examine how banks may draft them in the RCF agreement.

Important Definitions

The ‘Definitions’ section of the loan agreement will define the following terms.

Interest Rates

Interest rates will vary depending on the amount you utilise and the period for which the amount will stay borrowed. The loan agreement will usually specify that when the borrower informs the bank that it intends to utilise the RCF, the borrower has the option to choose the interest period.

The interest rate is usually calculated as a fixed amount above the base rate, which the Bank of England sets. For instance, the rate might be 0.25% (base) + 5%.

Terms Common to Other Loans

Your loan agreement will likely contain other common terms.

Conditions Precedents

Conditions precedents are certain things you or the bank must do before you can draw down the RCF. Alternatively, they may describe certain circ*mstances that must be in place before the contract will have an effect.

One typical example of a condition precedent is that the borrower must supply the bank with certain documents, such as its constitutional documents and financial records. If any of the conditions precedents are not met, the bank is not obligated to loan your company money.

Fees

Many business loans also contain a provision that entitles the bank to collect a fee for packaging and servicing the loan. The details of this fee, such as if it is a one-off or paid regularly, will be set out in a term of its own.

In addition, an RCF usually contains a “commitment fee”, which is usually calculated as a percentage of the total undrawn facility. For example, this might be 0.25%, due at the start of the loan or payable throughout predetermined periods.

Repayment, Prepayment, and Cancellation

The facility agreement will usually include one or more terms that specify:

• when you must repay the principal amount;
• under what conditions you can repay the amount earlier than scheduled (called a prepayment); and
• when the bank can order prepayments other than in events of default.

Indemnities

Indemnities obligate the borrower to reimburse the bank for certain expenses incurred under certain circ*mstances. The RCF agreement will specify these circ*mstances.

The most common indemnity clause requires the borrower to reimburse the bank for any costs it incurs if the borrower defaults under the terms of the loan. For many loans, there is also an indemnity clause for unauthorised prepayments.

Representations and Warranties

Representations and warranties are certain promises about your company you give the bank throughout the loan negotiation process. You will have breached the loan term if the bank later determines that these promises are not kept. In most cases, this is a serious breach and will qualify as an event of default.

Undertakings and Covenants

Undertakings and covenants are terms that codify other sets of promises you give to the bank. These refer specifically to things your business can and cannot do throughout the life of the loan. Some common examples include:

• not to borrow additional sums of money;
• not to grant other security interests in the company’s property; and
• to maintain specific financial performance indicators.

Like representations and warranties, if you breach an undertaking or covenant throughout the loan, this usually amounts to an event of default.

Events of Default

These are circ*mstances that, if they arise, allow the bank to terminate their agreement with you. These are called events of default. In practice, this means the bank can:

• demand you repay the outstanding amount and any interest due;
• refuse to provide you with any further money; and
• enforce their security over your property.

Key Takeaways

A revolving credit facility is a unique business loan that enables you to borrow a large sum of money according to your business’ needs. The rules on how much you can draw down and the interest rate are set out in the loan agreement. For this reason, you should always have a solicitor review the terms of any loan agreement, including any revolving credit facility, before you agree to them.

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