Revolving Loan Facility

What it is

A revolving loan facility (or revolver) is a flexible line of credit that lets a business draw, repay, and redraw funds up to an agreed limit during the life of the facility. Unlike a term loan with fixed principal repayments, a revolver provides ongoing access to liquidity to manage working capital and cash-flow variability.

Key takeaways

• Provides flexible access to funds: draw, repay, and re-borrow up to a set limit.
• Typically has a variable interest rate that tracks market indicators (e.g., prime rate).
• Best suited for managing short-term cash needs such as payroll, inventory, and timing gaps in accounts receivable.
• Lenders often review the facility periodically and can change terms or reduce availability based on the borrower’s financial health.
• Interest is charged only on the amount drawn, not the total facility amount.

How it works

• The lender approves a maximum credit limit based on the borrower’s financial profile.
• The borrower can draw any amount up to that limit, repay some or all of the balance, and draw again as needed.
• Interest is charged on the outstanding balance; fees may apply for maintaining the facility or for unused commitments.
• Rates are usually variable, so borrowing costs can increase or decrease with market rates.
• Annual or periodic covenant and financial reviews allow lenders to monitor risk and adjust the facility if necessary.

Approval criteria

Lenders evaluate:
* Historical and projected cash flows
Income statements, balance sheets, and cash-flow statements
Credit score and payment history
* Industry, company size, and stage of development
Companies with steady revenue, healthy cash reserves, and strong financial metrics are more likely to obtain favorable terms.

Common business uses

• Covering payroll during receivables timing gaps
• Purchasing inventory or equipment tied to short-term needs
• Financing seasonal fluctuations in sales
• Managing unexpected expenses or opportunities without taking a new term loan

Example

A manufacturer obtains a $500,000 revolving facility. Some months it draws $250,000 to cover payroll while waiting on receivables; other months it draws less and repays much of the balance. When a new contract requires machinery, the company draws $200,000 to buy equipment and repays as cash flow allows.

Repayment and interest

• There is no fixed amortization schedule; repayment is flexible so long as the borrower meets any minimum payment requirements.
• Interest accrues on the outstanding balance and can vary with benchmark rates.
• Fees may include commitment fees, origination fees, and charges for late payments or covenant breaches.

Risks and lender reviews

• Because the facility is typically variable-rate and subject to periodic review, the lender can reduce the limit or modify terms if the borrower’s financial condition weakens.
• Relying too heavily on a revolver for long-term financing can increase interest costs and refinancing risk.

Bottom line

A revolving loan facility is a practical liquidity tool for businesses with variable cash flows. It offers the convenience of on-demand borrowing and repayment, but borrowers should monitor costs, maintain financial transparency with their lender, and avoid using a revolver as a substitute for long-term capital.