Revolving Loan Facility

What is a 'Revolving Loan Facility'

A revolving loan facility is a financial institution that lets the borrower obtain a business or personal loan where the borrower has the flexibility to decide how often to withdraw from the loan and at what time intervals. A revolving loan facility allows a company to drawdown, repay and re-draw loans advanced to it. This type of loan is considered a flexible financing tool due to its repayment and re-borrowing flexibility. It is not considered a term loan because, during this allotted period of time, the facility allows the borrower to repay or take the loan out again.

BREAKING DOWN 'Revolving Loan Facility'

Based on the size, industry and stage it is in, a company may have access to financing through a revolving loan facility. For large public and private companies, this is a revolving credit arrangement letting a company’s outstanding loan balance fluctuate between zero and the maximum allowed in any given accounting period or payment cycle. Fees and interest are typically charged on the balance. The interest rate typically varies with a market indicator, such as the prime rate. The loan’s flexibility may be closely managed by the financial institution providing the facility.

How a Revolving Loan Facility Works

A company may borrow as much or as little as it needs for funding operations. As the company draws against the loan, the available balance decreases. The company makes principal payments to increase the available balance.

The most common revolving debt facility is a bank line of credit. A bank line of credit is typically approved for an indefinite time period but is subject to annual review.

Importance of Revolving Debt Facility

Many companies use a revolving debt facility for funding the gap between the company’s current liabilities requiring payments and the cash currently coming into the business. Although the end dates in revolving debt facilities are typically open-ended, if a company’s profit or operational cash flow lowers, the facility’s provider may reevaluate the loan and the loan amount. For this reason, a company should inform the lender in advance of such an event to help prevent a drastic reduction in available credit or a loan termination.

Example of Revolving Debt Facility

In February 2016, Peabody Energy Corp. drew down its remaining available balance of its $1.65 billion revolving credit facility. The St. Louis-based company cited badly-needed cash during the coal industry’s steep downturn. Peabody had been talking with bondholders about reducing its $6.3 billion debt load. As of November 5, the company had $1.2 billion available under its revolving loan, provided by lenders led by Citigroup Inc.

Peabody’s fully drawing down on its revolving loan signaled the company may have been building up its cash reserves before a bankruptcy filing or out of concern that its lenders may cut off access to credit. At the time, Peabody was attempting to reach deals with creditors out of court with help from restructuring advisors Lazard Ltd. and Jones Day since the previous year.

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