A revolving credit facility (RCF) is a kind of loan issued by a financial institution which provides the borrower access to the funds at any time he may require. This form of credit is generally most sought after by business firms or companies for operating purposes. This is because they often have unsteady fluctuation in their cash flows and may find revolving credit facility handy. In a term loan, allotment of funds is made with a fixed payment period. In revolving credit facility, however, a borrower can take withdraw, repay and withdraw again (thus the name revolver) to suit his cash flow.
The benefit can be accessed when you opt for a credit card apply facility for revolving credit. Every time you buy something on credit, that amount is subtracted from your total credit limit. And every time you pay off your balance, your credit limit goes back up.
Mechanism of Revolving Credit
A revolving loan is considered a variable line of credit because of the varying or fluctuating rates of interests it comes up with. If interest rates rise, the effect would be visible on revolving credit in the sense that here too the rate would rise. Interest rates in revolving credit are generally higher.
When a bank approves a revolver for a company, it takes into consideration many important factors to ascertain the creditworthiness of the company. The factors which shape the creditworthiness of the company include revenue statement, cash flow statement and balance-sheet statement. The balance on a revolving loan facility may move between zero and the maximum approved value.
It does share some similarity with credit cards. If you are looking for a credit card in order to avail such benefit, click on the credit card apply link and choose the one that suits best your needs. Returning back to the RCF, let us learn about its characteristic features.
Features of RCF
Re-borrowing
As the name suggests, revolving credit facility or revolver is called so because once the outstanding amount is paid off the borrower can reuse it time and again as per his suitability. It’s a revolving cycle of withdrawing, spending, and repaying any number of times until the deal or the term of the revolver ends. This loan is different from an instalment loan, where there are fixed payments on a monthly basis over a set period of time. Having once paid the instalment loan, you cannot use it again like the revolving credit facility. The borrower would be required to apply for a new instalment loan.
Interest Charged
A company or private business will be charged interest only on the withdrawal amount and not on the approved credit limit. The rest of the amount in the revolver stays accessible as and when required. A business venture can either pay the interest amount at once or simply opt for monthly payments. As already mentioned, the rate of interest is variable though usually not far from the credit rate on the time of approval.
Credit Limit
A company experiencing a shortfall in cash flows and is under obligation to get done with some financial payments can immediately borrow from a revolver. However, there is a credit limit to the amount he can withdraw. This maximum withdrawal amount is set by the bank. The credit limit is by no means permanent. Every year the bank analyses the financial activity of the borrower and based on his creditworthiness determines the maximum borrowing amount to be allowed. So if the borrower’s business seems to be failing, the bank may reduce the credit limit and if the company is running with a good credit score the bank may increase the credit limit.
Debt Sweep
The revolving credit facility is often designed with a debt sweep provision. This implies that any excess revenue generated by a company will be used by the loaner bank to pay off the outstanding debt of the revolver ahead of the schedule. Doing so forces the company to make payment at a faster rate instead of appropriating the cash to its shareholders. This also minimizes the credit risk and liability that comes from a company going through its cash reserves for other purposes, such as making large, excessive expenses.
Commitment Fee
To approve the loan a bank generally charges what is called a commitment fee. This is done in order to compensate the lender for maintaining an account of the potential loan. Since interest charges are only to be applied when the revolver is drawn, the commitment fee is a self-favor to the bank. The commitment fee can either be a flat fee or a fixed percentage.
Benefits of RCF
- The flexibility of availing money when required
- Amount to be had always available in short notice
- No cumbersome process of making a new agreement with each borrowing
- No security required as such
- Making your business partners and other merchants working with you happy and assured
A revolving credit facility, thus, is an interesting and advantageous offer for companies with uncertain cash flows. If you too are to avail this form of loan, go for a credit card apply facility which allows this option.
