What Is a Revolving Credit Facility?
A revolving credit facility, or revolver, is a committed line of credit from one or more banks that a company can draw on, repay, and redraw throughout the life of the facility. Unlike a term loan, which is borrowed once and paid down on a schedule, a revolver's balance moves up and down with the company's needs.
Revolvers are the workhorse of corporate liquidity. They typically sit at the top of the capital structure as senior secured debt, often backed by receivables and inventory, and they usually carry the lowest interest rate of any debt a company has.
How It Works
The company pays interest only on the amount actually drawn, usually a floating rate such as a benchmark rate plus a spread. On the undrawn portion, it pays a small commitment fee, often around 0.25 to 0.50 percent per year, to compensate the banks for keeping the capital available.
Many revolvers include a springing financial covenant, such as a maximum leverage ratio that is only tested when the facility is drawn beyond a certain threshold. Asset-based revolvers go further and tie availability to a borrowing base, a formula such as 85 percent of eligible receivables plus 60 percent of eligible inventory.
Example
Suppose a retailer has a 100 million dollar revolver priced at a benchmark rate of 4 percent plus a 2 percent spread, with a 0.375 percent commitment fee on undrawn amounts. Ahead of the holiday season it draws 40 million dollars to buy inventory.
For the period the draw is outstanding, it pays 6 percent annualized on the 40 million dollars drawn, about 200,000 dollars per month, plus the 0.375 percent fee on the 60 million dollars undrawn, roughly 18,750 dollars per month. After the holidays, it repays the 40 million dollars from sales proceeds and the full 100 million dollars becomes available again.
Why It Matters
A revolver is often the difference between a temporary cash crunch and a genuine crisis, which is why analysts track undrawn revolver capacity as a core measure of liquidity. Heavy, sustained revolver usage can be an early warning sign of distress, and companies drawing down their revolvers fully made headlines during past credit crunches.
In leveraged finance and credit analysis, virtually every deal includes a revolver alongside term loans, so understanding drawn versus undrawn economics is essential day-one knowledge.
