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
Key Takeaways. 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.
What are the risks of revolving credit facilities? ›
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 revolving credit select the best answer? ›
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.
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.
Can you settle a revolving loan? ›
To settle a revolving credit plan, you can request a settlement letter to obtain the balance that needs to be paid off.
What is the difference between a loan and a revolving facility? ›
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.
Are revolving loans good? ›
A revolving loan shares more similarities with a credit card or an overdraft on your bank account, in that you can use it multiple times if you keep up with payments. This means that if you want continuous access to the money you borrowed, a revolving loan may be better suited to your needs.
Why is revolving debt bad? ›
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.
What are the pros and cons of using revolving credit? ›
With its flexibility and convenience, it provides borrowers with the freedom to manage their expenses based on their changing financial circ*mstances. However, it's crucial to consider the potential drawbacks of revolving credit lines, such as high-interest rates and the potential for overspending.
What are 3 types of revolving credit? ›
The most common types of revolving credit are credit cards, personal lines of credit and home equity lines of credit.
Credit utilization looks at how much of your total available credit you have used, meaning your total credit across all of your credit cards and other revolving credit products. Experts recommend that your credit utilization ratio be no higher than 30 percent if possible.
How to pay off revolving credit? ›
Pay off your balance more than once per month.
Balances are reported once a month (or at least every 45 days), but many people receive paychecks more than once per month. It may help with your cash flow to pay your revolving credit balances every time you receive a paycheck.
Do you pay interest on a revolving credit facility? ›
With a revolving line of credit, you have an available credit limit. This lets you borrow what you need, when you need it, and pay interest only on the amount you borrow, not the total credit limit amount.
What is the interest rate for a revolving credit facility? ›
The cost of a revolving credit facility can vary depending on several factors such as the size of the facility, the creditworthiness of the business, and the security available. A typical monthly interest rate would be from 1% to 4% and most facilities have a one-off arrangement fee of 2 – 3%.
What is the commitment fee for revolving credit facility? ›
The percentage fee generally varies between 0.25% and 1%. The fee is usually paid after the credit agreement's been finalized. However, the amount can be charged periodically if it is charged on the undistributed loan. In such cases, the fee is based on the average balance of the undisbursed loan amount.
Do revolving accounts hurt your credit? ›
Revolving accounts are continuous, meaning they'll appear on your credit reports as long as the account remains open. Your payment history can also affect your credit scores. However, there's another important factor to consider when it comes to revolving credit: your credit utilization ratio.
What are 3 examples of revolving credit? ›
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.
Can you withdraw from revolving credit? ›
Revolving credit or revolving accounts function by giving you the choice to withdraw funds multiple times until you reach a set limit (or your credit limit). You decide how much money you borrow and how much your repayments will be, beyond the minimum payment requirements.
