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 drawdown, repay and redraw loans advanced to it. This type of loan is considered a flexible financing tool due to its repayment and reborrowing 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'

A revolving loan facility is typically a variable line of credit used by public and private businesses. Criteria of the loan depend on the stage, size and industry in which the business operates. The financial institution typically examines the company’s income statement, statement of cash flows and balance sheet when deciding whether the business can repay a debt. In most cases, if the company has steady income, strong cash reserves and a good credit score, a loan is granted.

The balance on a revolving loan facility may move between zero and the maximum approved value. The financial institution typically charges a fee for extending the loan and a variable interest rate on the loan balance. The rate is often higher than rates charged on other loans and changes with the prime rate or another market indicator. For this reason, when the Federal Reserve increases or decreases interest rates, charges on a revolving loan facility go up or down.

Importance of a Revolving Loan Facility

A revolving loan facility allows a business to borrow money as needed for funding working capital needs and continuing operations. This is especially helpful during times of great income fluctuations, as bills and unexpected expenses may be covered by the funds. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance.

The financial institution may review the revolving loan facility annually. If a company’s revenue shrinks, the institution may decide to lower the maximum amount of the loan. Therefore, it is important the business owner discuss the company’s circumstances with the financial institution to avoid reduction in or termination of the loan.

Example of Revolving Loan Facility

Supreme Packaging secures a revolving loan facility for $500,000. The company uses the credit line for covering payroll as it waits for accounts receivable payments. Although the business uses up to $250,000 of the revolving loan facility each month, it pays off most of the balance and monitors how much available credit remains. Because another company signed a $500,000 contract for Supreme Packaging to package its products for the next five years, the packaging company is using $200,000 of its revolving loan facility for purchasing the required machine.

RELATED TERMS
  1. Loan

    The act of giving money, property or other material goods to ...
  2. Credit Facility

    A type of loan made in a business or corporate finance context. ...
  3. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  4. Facility

    A formal financial assistance program offered by a lending institution ...
  5. Term Out

    The transfer of debt within a company's balance sheet without ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
Related Articles
  1. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  2. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  3. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  4. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  5. Personal Finance

    All About Government Loans

    There are many reasons to seek a government loan rather than one from a private lender. Government loans typically have low interest rates and offer fixed or subsidized options, as well as deferred ...
  6. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  7. Personal Finance

    College Loans: Private vs. Federal

    Not all student loans are the same. Know what you're getting into before signing on the dotted line.
  8. Retirement

    Sometimes It Pays to Borrow from Your 401(k)

    401(k) loans have been demonized, but they're often the most beneficial source of cash.
RELATED FAQS
  1. What are the differences between revolving credit and installment credit?

    Discover how to distinguish between installment credit loans and revolving credit loans, and learn how they affect your credit ... Read Answer >>
  2. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  3. What are the differences between revolving credit and a line of credit?

    Understand how to differentiate between a line of credit and a revolving credit account, and find out why business owners ... Read Answer >>
Trading Center