What Is a Revolving Loan Facility?

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What Is a Revolving Loan Facility?

Let me explain what a revolving loan facility is—it's essentially a flexible credit line, often called a revolver or revolving credit facility, that gives you as a business owner the ability to draw funds, repay them, and draw again over an agreed period. Unlike term loans that lock you into a fixed repayment schedule, this setup lets you access credit continuously, which is crucial for managing those ups and downs in cash flow. You can repay and re-borrow as your needs shift, making it a solid option if you're looking to keep your financial operations stable.

Understanding the Mechanics of a Revolving Loan Facility

Think of a revolving loan facility as a variable line of credit that both public and private businesses use. The interest rate fluctuates, so if market rates go up, your bank might hike the rate on your loan—it's typically higher than rates on other loans and ties to the prime rate or similar indicators. Banks charge a fee for providing this, and approval depends on your business's stage, size, and industry. They'll review your income statements, cash flow, and balance sheets to ensure you can repay. You're more likely to get approved with steady income, strong reserves, and a solid credit score. The balance can swing from zero up to the max limit.

Practical Applications of Revolving Loan Facilities for Businesses

In practice, you can use a revolving loan to borrow exactly what you need for working capital or ongoing operations. It's especially handy during revenue dips, letting you cover bills or surprises by drawing on the credit line—drawing reduces the available balance, but repayments increase it. Keep in mind, the bank might review it yearly and cut the limit if your revenue drops, so you should talk to them about your situation to prevent reductions or cancellations.

Example of a Revolving Loan Facility

Take Supreme Packaging as an example—they got a $500,000 revolving facility and use it to cover payroll while waiting on receivables. They draw up to $250,000 monthly but pay most of it back, keeping an eye on remaining credit. With a new $500,000 contract, they're using $200,000 from the facility to buy machinery for the job.

How Long Do You Have to Repay a Revolving Loan Facility?

Unlike term loans with fixed payments, there's no set term here—you withdraw as needed, which reduces available credit, then repay to restore it.

Are All Revolving Loan Facilities for Businesses?

For this discussion, yes, we're focusing on business use, though similar principles apply to personal options like home equity lines.

Do You Pay Interest on a Revolving Loan Facility?

Yes, interest applies to what you borrow, just like other loans, but the key is borrowing only as needed, repaying, and borrowing again instead of taking a lump sum.

The Bottom Line

If your business has fluctuating income, a revolving loan facility can help cover payroll or unexpected costs. Setting one up with your bank might be a smart step for you.

Key Takeaways

A revolving loan facility lets you draw, repay, and re-borrow as needed, offering more flexibility than term loans.
Interest rates are variable and can change with the market, often higher than fixed-term options.
Use it for working capital, cash flow issues, and surprises.
Banks review annually, potentially adjusting terms based on your finances.
Interest is only on borrowed amounts, with ongoing access up to the limit.

What Is a Revolving Loan Facility?

Highlights