Revolving Credit Facility
IntermediateA revolving credit facility is a flexible borrowing arrangement, usually provided by banks to companies, that allows the borrower to draw money up to an agreed limit, repay it and borrow again as needed during the term of the facility.
A revolving credit facility, often called a revolver, works like a corporate version of a credit card. The company does not receive a lump sum. Instead, it has access to funds it can use whenever needed, paying interest only on the amount drawn.
Companies typically use revolving facilities to manage day-to-day cash needs, such as paying suppliers, covering seasonal fluctuations in sales or providing a safety net in case of unexpected expenses.
For example, a retailer might have a revolving credit facility of 50 million. Before the holiday season, it draws 30 million to build up stock, then repays it after the busy sales period.
Besides interest on the amount drawn, the company usually pays a commitment fee on the unused portion of the facility, because the bank has to keep that money available. Revolving facilities often last several years and include covenants, conditions the company must meet to keep the facility in place. Having an undrawn revolver gives investors and lenders confidence that a company can access cash if it needs to.
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