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
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.
How does a revolving facility work? ›
With a revolving facility, the lender stipulates the maximum amount you can spend, however within that you have the freedom to decide how much you borrow and pay back every month. Your payment terms will specify how quickly you need to make repayments after withdrawing the funds.
How does a revolving loan fund work? ›
Revolving loan funds (RLFs) use a source of capital, typically offered by a local or state government, to make direct loans to borrowers for clean energy projects. Proceeds from loan repayments flow back into the fund and become available to lend again.
How does a revolving credit loan work? ›
Revolving home loans work like a big overdraft. Your loan becomes your everyday account, so money flows in and out of your loan balance as you get paid and as you spend and pay bills. Unlike term loans, there are no set repayments on set dates. You can make repayments whenever you like, for as much as you like.
How does a revolver loan work? ›
In revolver debt, the borrower can re-access any funds that have been paid back. In installment loans, once the loan has been repaid, the borrower must reapply for a second loan if he or she wishes to borrow more. In revolver debt, there may not be a fixed payment value or term.
What is the disadvantage of revolving credit facility? ›
Revolving credit tends to have higher interest rates than other forms of funding, and some lenders charge extra interest if repayments are late. This could cause cash flow problems for your business.
What is a revolving loan example? ›
Common examples of revolving credit include credit cards, home equity lines of credit (HELOCs), and personal and business lines of credit. Credit cards are the best-known type of revolving credit. However, there are numerous differences between a revolving line of credit and a consumer or business credit card.
What is the difference between a loan and a revolving loan? ›
Revolving credit is when you can borrow money up to a certain limit and pay it back as you wish, like using a credit card. Installment credit is a loan with a set amount of money that you pay back in fixed payments over time, like a car loan or a mortgage. Created by Sal Khan.
What is a revolving fund in simple terms? ›
A revolving fund is a fund or account that remains available to finance an organization's continuing operations without any fiscal year limitation, because the organization replenishes the fund by repaying money used from the account. Revolving funds have been used to support both government and non-profit operations.
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.
Having a large balance of revolving credit, such as on a credit card, can be dangerous. High interest can accumulate quickly and you may struggle to pay off your debts. However, as long as you pay off your balance frequently, credit cards can help build credit.
How is revolving credit paid? ›
You can choose to pay off the balance in full at the end of each billing cycle or you can carry over a balance from month to month, “revolving" the balance, but you'll have to make the minimum payment to avoid penalties.
Can you borrow any amount of money in revolving credit? ›
A revolving credit allows the account holder to borrow money repeatedly up to the maximum amount he/she is approved for.
What is the margin on a revolving credit facility? ›
Revolving Credit Facility: Utilization/Drawn Margin
The utilization/drawn margin refers to the interest charged on what's actually drawn by the borrower, which is typically priced as a benchmark interest rate (LIBOR) plus a spread.
How much does a revolving credit facility cost? ›
Typically you'd expect to pay: A daily interest rate between 0.05% and 0.1% An arrangement fee between 2-4% Other fees, such as penalty fees if you exceed the credit limit.
What is a good amount of revolving credit to have? ›
To maintain a healthy credit score, it's important to keep your credit utilization rate (CUR) low. The general rule of thumb has been that you don't want your CUR to exceed 30%, but increasingly financial experts are recommending that you don't want to go above 10% if you really want an excellent credit score.
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.
How does a revolving charge work? ›
Revolving credit accounts are open-ended debt. They don't have an expiration date and generally stay open as long as the account is in good standing. As money is borrowed from a revolving account, the amount of available credit goes down. As the debt is repaid, the available credit goes back up.
What happens when a revolving credit facility matures? ›
Therefore, once the maturity date is achieved and the total loan repayment is achieved, the contract between the debtor and the creditor ends.
How do I pay revolving utilization? ›
How to Lower Your Credit Utilization Rates
- Pay down credit card balances early. ...
- Ask your card issuers to raise your limits. ...
- Keep your reported income updated. ...
- Use an installment loan to consolidate revolving debt. ...
- Open new lines of credit. ...
- Don't close your credit cards.
