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.