REVOLVING LOAN FACILITY

WHAT IS A REVOLVING LOAN FACILITY?

A revolving loan facility is a type of credit provided by a financial institution that allows the borrower to draw down or withdraw funds, repay the loan, and withdraw funds again. Because of its repayment and re-borrowing options, a revolving loan is considered a flexible financial strategy. It is not a term loan because the facility allows the borrower to repay the loan or take it out again over a set period of time, whereas a term loan provides a borrower with funds and a set payment schedule.

WHAT IS A REVOLVING LOAN FACILITY?

A revolving lending facility is a type of variable line of credit that is commonly employed by both public and commercial companies. Because the credit line’s interest rate might fluctuate, the line is variable. In other words, if credit market interest rates rise, a bank may raise the rate on a variable-rate loan. As a result, the rate is frequently higher than other loan rates, and it fluctuates with the prime rate or another market indicator. In addition, a fee is usually charged by the financial institution for extending the loan.

The loan approval criteria are determined by the stage, size, and industry in which the business operates. When deciding whether a firm can repay a debt, the financial institution often looks at the company’s financial statements, which include the income statement, statement of cash flows, and balance sheet. If a company can demonstrate consistent income, substantial cash reserves, and a solid credit score, the chances of the loan being accepted increase. A revolving lending facility’s balance might fluctuate between zero and the maximum amount permitted.

HOW TO USE THE REVOLVING LOAN FACILITY FOR BUSINESSES?

A revolving loan facility allows a company to borrow money as needed to cover working capital needs and continue operations. Bills and unforeseen expenses can be paid by drawing on a revolving line of credit, which is especially useful during times of revenue changes. Drawing on the loan reduces the available balance, but repaying the debt increases the available balance.

The revolving loan facility may be reviewed by the financial institution once a year. If a company’s revenue declines, the lending institution may decide to reduce the loan’s maximum amount. As a result, it is critical for the business owner to discuss the company’s situation with the financial institution in order to avoid a loan reduction or cancellation.

REVOLVING LOAN FACILITY ELIGIBILITY CRITERIA

Lenders will set a maximum facility size based on the company’s financial status and any collateral provided. A director’s personal guarantee is usually the only form of security.

In some situations, a commitment fee is charged upfront for the ‘right to access the facility, in addition to the regular monthly interest charged on the amounts drawn down at any given time.

Revolving credit facilities have greater fees than fixed-term loans because of their ease and flexibility. The duration will most likely be between 6 months and 2 years, but if all goes well, a lender will usually offer a renewal at the end.

A lender’s offer is normally computed as one month’s revenue, but in the case of strong firms or returning customers, they may give a top-up or raise in the limit after only a few months. Revolving credit facilities are often available to businesses that would otherwise struggle to obtain financing because they are often short-term contracts.

The lender’s primary concern is the quantity of consistent cash flow through the account, which means that for smaller transactions, they will frequently look only at the business bank account and will frequently be unable to fund new businesses (trading less than three months).

AN EXAMPLE OF A REVOLVING LOAN FACILITY

A company (Company X) obtains a £500,000 revolving loan arrangement. While waiting for accounts receivable payments, the corporation uses the credit line to finance payroll. Although the company uses up to £250,000 of the revolving loan facility each month, it pays down the majority of the debt and keeps track of how much credit is still available. For example, company X is spending £200,000 of its revolving loan capacity to purchase the appropriate machinery after another company secured a £500,000 contract for Company X to package its products for the next five years.

BENEFITS OF A REVOLVING LOAN FACILITY

  • Flexibility
  • Quick decisions – can be set up in as little as a few hours
  • There is no need for a new agreement.
  • There is no need for security.
  • User-friendly online portals
  • Can assist you in maintaining a pleasant supply chain
  • It can be utilized in conjunction with other sources of funding.

THE DIFFERENCES BETWEEN A REVOLVING CREDIT FACILITY AND A CREDIT CARD

  • In the event of a credit card, the person must carry the credit card with them at all times to make purchases.
  • Revolving credit facilities, on the other hand, do not require the use of a card. Instead, they can deposit the funds into their company account for any purpose they need.
  • The fees for a credit card are frequently substantially higher than the fees for revolving credit facilities.
  • Revolving credit facilities offer far more credit flexibility than credit cards.