Key Takeaways
- Flexible credit line with redrawable borrowing.
- Interest charged only on drawn amounts.
- Used for short-term liquidity and working capital.
- Repayments replenish borrowing capacity until maturity.
What is Revolver?
A revolver, also known as a revolving credit facility, is a flexible facility provided by banks that allows businesses to borrow, repay, and redraw funds up to a set limit during the term. This revolving structure offers ongoing liquidity, making it distinct from fixed-term loans with no reuse after repayment.
It functions similarly to a corporate credit card but is designed for business financing needs, providing a critical backstop for short-term cash flow fluctuations.
Key Characteristics
Revolvers have several defining features that make them suitable for managing operational liquidity.
- Flexible borrowing: You can draw funds multiple times up to the credit limit, repaying and reborrowing as needed.
- Interest on drawn amounts: Interest accrues only on the amount you use, not the total credit line.
- Variable interest rates: Typically tied to benchmarks like LIBOR or prime plus a spread, reflecting your credit risk.
- Commitment fees: Banks charge fees on undrawn amounts to compensate for reserved capital.
- Term length: Usually 3-5 years with possible renewal or rollover options depending on performance.
How It Works
Revolvers provide ongoing access to capital, helping you manage working capital and short-term obligations. Once approved, you can draw any amount up to your limit, repay it, and draw again without reapplying.
Interest is charged only on the used portion, with repayment schedules often flexible and tied to cash flow. Banks may enforce a ramp-up period or adjust limits based on your financial health and market conditions.
Examples and Use Cases
Revolver facilities are widely used across industries for liquidity management and contingency funding.
- Airlines: Companies like Delta rely on revolvers to cover operational expenses during revenue fluctuations.
- Consumer businesses: Retailers often use revolvers as backstops to manage inventory purchases and seasonal cash needs.
- Small businesses: Revolving credit can serve as an affordable alternative to credit cards; check out our guide on best low-interest credit cards for consumer parallels.
Important Considerations
While revolvers offer flexibility, they require disciplined cash flow management to avoid overreliance that may signal financial stress. Banks can reduce your limit or refuse renewal if performance declines, impacting your access to liquidity.
Understanding fee structures and interest calculations is essential to minimize costs. Considering alternatives such as secured credit lines or comparing options from best bank stocks may provide insights into lender stability and terms.
Final Words
A revolver offers flexible short-term liquidity by letting you borrow, repay, and redraw funds within a set limit, making it ideal for managing working capital fluctuations. To optimize your financing, compare terms and fees from multiple lenders to ensure the facility aligns with your cash flow needs and credit profile.
Frequently Asked Questions
A revolver, or revolving credit facility, is a flexible line of credit that businesses can draw from up to a set limit, repay, and draw again as needed during the term. It works like a corporate credit card, providing ongoing liquidity for short-term needs.
Unlike term loans which have fixed payments and no reuse after payoff, a revolver allows businesses to borrow, repay, and redraw funds multiple times up to a credit limit during its term. Interest is only charged on the amount drawn, not the full credit line.
Businesses often use revolvers to cover short-term cash shortfalls, manage working capital, or fund operational expenses. It provides flexibility to respond to fluctuating cash flow needs without taking on long-term debt.
Interest rates on revolvers are usually variable, based on benchmarks like LIBOR plus a spread depending on credit quality. Borrowers pay interest only on drawn amounts, plus commitment fees on undrawn portions and sometimes upfront fees when the facility is established.
Banks assess a business's creditworthiness by reviewing financial statements such as income, cash flow, and balance sheets. The maximum borrowing limit is set accordingly and typically reviewed annually, with possible adjustments based on business performance.
At the end of the revolver's term, the business must repay any outstanding balance in full. Some revolvers may allow rollover or extension under certain conditions, while others may have no fixed expiration if the borrower's credit remains strong.
Investment-grade companies often keep their revolvers undrawn as a financial backstop or liquidity cushion, paying only commitment fees. This strategy supports short-term funding needs or commercial paper programs without incurring interest on borrowed amounts.
