revolver loan

revolver loan

A line of credit, sometimes called a bank line, is the most you can borrow under a revolving credit arrangement with a credit card issuer, bank, or mortgage lender.

When you borrow against a line of credit, you pay interest on the amount of money you actually borrow, not on the available balance, or full amount you are able to borrow.

For example, if you have a $10,000 line of credit on a credit card, you may borrow as much or as little as you want up to that amount, and you pay interest only on the amount you have borrowed.

If you carry a balance of $3,000, you only pay interest on that amount, but there is still $7,000 available for you to borrow. Once you repay the amount you borrow, you can use it again.

A line of credit may be secured with collateral, or unsecured. A line of credit on a credit card is usually unsecured, for example. But if you have a home equity line of credit, your home serves as collateral against the amount you borrow.

Practical Law Dictionary. Glossary of UK, US and international legal terms . . 2010 .

revolving loan — UK US noun [C] ► FINANCE, BANKING REVOLVING LINE OF CREDIT(Cf. ↑revolving line of credit): »Companies that are restructuring are struggling to get revolving loans from lenders … Financial and business terms

revolving loan — loan that is automatically renewed at the end of its term … English contemporary dictionary

revolving loan — noun A type of loan that is secured against a property and allows the owner to borrow and repay money at his or her leisure. Periodic payments of at least accumulated interest are required but the loan is fully open: may be paid out in whole or… … Wiktionary

revolving loan — A loan which is expected to be renewed (i.e. turned over) at maturity … Black's law dictionary

Revolving Loan Facility — A financial institution that allows the borrower to obtain a business or personal loan where the borrower has the flexibility to decide how often they want to withdraw from the loan and at what time intervals. A revolving loan facility allows a… … Investment dictionary

Revolving Loan Fund — A Revolving Loan Fund (RLF) is a source of money from which loans are made for small business development projects. A loan is made to one person or business at a time and, as repayments are made, funds become available for new loans to other… … Wikipedia

revolving credit loan — USA revolving credit loan, Also known as revolving credit facility, revolving loan and revolver. A committed loan facility allowing a borrower to borrow (up to a limit), repay and re borrow loans. See also revolving … Law dictionary

revolving credit — re·volv·ing credit n: a credit which may be used repeatedly up to the limit specified after partial or total repayments have been made Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. revolving credit … Law dictionary

revolving line of credit — A type of credit facility. A term that can be confusing, with different banks using the term to describe different types of credit facilities. 1. In some banks, revolving line of credit refers to a credit facility that permits the borrower to… … Financial and business terms

Revolving line of credit — A bank line of credit on which the customer pays a commitment fee and can take down and repay funds according to his needs. Normally the line involves a firm commitment from the bank for a period of several years. The New York Times Financial… … Financial and business terms

Examples of Revolver Loan in a sentence

Definition of Revolver Loan in Intercreditor Agreement

Revolver Loan means each Loan with respect to which the Borrower has a revolving credit commitment to advance amounts to the applicable Obligor during a specified term.

Definition of Revolver Loan in Credit Agreement

Revolver Loan means the revolving loan facility in the Revolver Loan Amount being provided to the Borrowers in accordance with the terms of Article II of this Agreement.

Definition of Revolver Loan in Amended and Restated Credit Agreement

Revolver Loan means a loan made or to be made by a Revolver Lender pursuant to Section 2.01(a).

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.

How a revolver works and how to model it

What is a Revolving Credit Facility?

A revolving credit facility is a line of credit that is arranged between a bank and a business. It has an established maximum amount, where the business has access to the funds at any time when needed. This type of credit is mostly useful for operating purposes, especially for any business experiencing sharp fluctuations in their cash flows and some unexpected large expenses. In other words, it is needed for companies that have low cash balances to support their net working capital needs. Because of this, it is often considered a form of short-term financing, which is usually paid off quickly.

When a company applies for a revolver, a bank considers several important factors to determine the credit worthiness of the company. This includes the income statement, cash flow statement and balance sheet statement.

The other names for a revolving credit facility are operating line, bank line or, simply, a revolver.

Features of a Revolving Credit Facility

The revolver is often structured with a cash sweep (or debt sweep) provision. This means that any excess free cash flow generated by a company will be used by the bank to pay down the outstanding debt of the revolver ahead of schedule. Doing so forces the company to make repayment at a faster rate instead of distributing the cash to its shareholders or investors. In addition, it minimizes the credit risk and liability that comes from a company burning through its cash reserves for other purposes, such as making large, excessive expenses.

The borrower is charged the interest based only on the withdrawal amount and not on the entire credit line. The remaining portion of the revolver is always ready for use. This feature of built-in flexibility and convenience is what gives the revolver its main advantage. As for its outstanding balance, a business can have the option to pay the entire amount at once or spread them out into minimum monthly payments. The interest rate is usually equal to the rate found on a company’s senior term debt. Moreover, it is variable and is based on the bank’s prime rate plus a premium, which depends on the credit history of the company.

When a company experiences a shortfall, where there are fewer amounts of funds to meet financial obligations, it can be corrected promptly by borrowing from a revolver. Though, there is a maximum borrowing amount set by the bank. However, the bank may review the revolver annually. If revenues of a business drastically fall, the bank may lower the maximum amount of the revolver to protect it from default risk. But, if a company has a good credit score, strong cash reserves, a steady and rising bottom line and is making regular, consistent payments on a revolver, the bank may agree to increase the maximum limit.

To commence the loan, a bank may charge a commitment fee. It’s usually associated with a revolver that hasn’t been used up at all. This compensates the lender for keeping an open access to a potential loan, where interest payments are only activated when the revolver is drawn. The actual fee can either be a flat fee or a fixed percentage.

This type of loan is named a revolver because once the outstanding amount is paid off, the borrower can use it over and over again. It’s a revolving cycle of withdrawing, spending and repaying in any number of times until the arrangement expires – the term of the revolver ends. This is different from an installment loan, where there are monthly fixed payments over a set period. Once this loan is fully paid, you can’t use it again like the revolver. The borrower has to apply for a new installment loan.

A revolving credit facility is an important part of a financial modeling because it underscores changes in a company’s debt based on operating assumptions. For instance, if it’s projected that revenues will drastically fall in the coming years, a company will look for additional sources of financing to spend, let say, on R&D or make capital expenditures as ways to grow the business. It may issue more debt to make these necessary expenses. Though, the company may find it difficult to service debt within a year if business conditions continue to worsen. As mentioned before, the company can perform a revolver

As mentioned before, the company can perform a revolver drawdown, if it has insufficient cash to service debt. Thus, a change in the revolver is triggered by a change in a company’s debt level. Furthermore, a revolver helps with keeping a financial model balanced because it calculates any excess cash generated or cash shortfall for a given year.

An example of a Revolving Credit Facility:

In the hospitality industry, which is considered seasonal, a ski resort may experience a shortage in operating income during the summer months; therefore, it may not be able to cover its payroll. Additionally, if it’s making most of its sales on credit, then the company will be waiting to cash its receivables before making inventory expenses. Having a revolver will allow the company to have access to funds at any time when it requires it for its day to day operations.

Calculation of Sweep (see figure below)

To calculate the cash available for sweeping, we take the beginning cash balance that is found on last year’s balance sheet under assets and subtract from it the estimated minimum cash balance required to keep a company running. Further diligence is performed if we need the accurate minimum cash balance.

The difference is then added to the cash flow from operating activities, investing activities and financing activities related to stocks in the period. We now have cash that is available for debt service. After that, we take the sum for all the scheduled debt repayments and subtract it from the cash available for debt service.

If the difference turns out to be positive, then we have enough cash to make the scheduled debt repayments and can even pay down a portion or all of the revolver’s outstanding balance. The company can even make early full repayments of other debt balance. But, if the difference is negative, there wouldn’t be enough cash to make debt repayments; therefore, the company will have to draw from the revolver to cover the shortage of cash.

We hope this has been a helpful guide to understanding how a Revolving Credit Facility works and how to incorporate it into your financial modeling.

Additional relevant resources to help you in our career include:

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