This guide delves into the intricacies of revolving credit facilities, explaining how they work, their benefits, and critical business considerations. Discover how these flexible financing solutions can help you manage cash flow, seize opportunities, and fuel growth.
What is a revolving credit facility?
Revolving credit facilities (RCF) are flexible lines of credit that allow the borrower to borrow money repeatedly, up to a set limit. As the borrower pays back the loan, their borrowing limit is restored, allowing them to use it again.
Revolving credit meaning
Revolving credit is a flexible financing option that provides borrowers with ongoing access to a predetermined credit limit. As the borrower repays portions of the loan, the available credit limit is replenished, allowing for repeated use. This type of credit is commonly used in business lines of credit.
How a Revolving Credit Facility Works?
An RCF is like a revolving door – you can enter and exit as needed. Here is how it works –
- Credit Limit: A lender sets a maximum amount the borrower can borrow.
- Drawing Funds: The borrower can withdraw funds up to the credit limit from the credit line as needed.
- Repayment: The borrower can repay the loan in full or make partial payments.
- Credit Limit Restoration: As the borrower repays the loan, their available credit limit is replenished.
- Repeat Cycle: The process of drawing funds, repaying, and redrawing can be repeated multiple times within a specified timeframe.
NOTE: Some interest is calculated on the amount borrowed. This interest rate is often variable and adjusts based on market conditions. Lenders may also impose various fees, including processing, commitment, utilization, and renewal fees. Additionally, revolving credit facilities typically have a specified term, often one year. After this period, the facility can be renewed, subject to the lender’s approval and assessment of the borrower’s financial health.
Example of a Revolving Loan Facility
Imagine you own a small-scale manufacturing business in Mumbai, India, and face fluctuating working capital needs throughout the year, especially during peak production seasons. To manage these fluctuations, you decide to opt for a revolving loan facility from a financing company. Here’s how it works:
Credit Limit: You apply for the facility digitally and get approved for a credit limit of ₹50 lakhs. This is the maximum amount you can borrow at any given time.
Drawdowns: During peak production months, you might withdraw ₹30 lakhs to purchase raw materials, pay labor costs, and meet other operational expenses. In slower months, you may only draw ₹10 lakhs to cover minimal costs.
Repayments: You make regular monthly repayments based on your cash flow. As you repay, your available credit limit is replenished.
Redrawing: Once you’ve repaid a portion of the borrowed amount, you can access funds again up to your credit limit for future needs. This flexibility allows you to manage your cash flow effectively and seize growth opportunities.
Features of a Revolving Credit Facility
Flexibility and convenience
A revolving credit facility offers unparalleled flexibility. You can access funds whenever needed, up to your approved credit limit. This makes it ideal for managing unexpected expenses or seizing timely opportunities. Moreover, you only pay interest on the amount you actually borrow, reducing your overall financing costs.
Continuous usage
Unlike traditional loans with fixed tenures, a revolving credit facility allows for continuous usage. Your credit limit is restored once you repay a portion of the loan. This means you can repeatedly access funds as needed, providing a reliable source of financing for your ongoing needs.
Predictable costs
With a revolving credit facility, you benefit from fixed interest rates. This means you can accurately predict your monthly repayments, making financial planning easier. You won’t be surprised by fluctuating interest rates, ensuring stability in your financial commitments.
No rigid repayment structure
Depending on the lender, a revolving credit facility offers freedom in repayment. You’re not tied to a strict repayment schedule. You can make payments at your convenience, whether it’s a minimum payment or a larger amount. Additionally, you can prepay your loan without incurring any penalties, giving you the power to accelerate your debt repayment.
Get your next revolving credit facility with GetVantage
GetVantage is a leading platform that offers non-dilutive funding solutions for startups and MSMEs. By leveraging advanced technology and data-driven insights, we provide quick and hassle-free access to capital. With flexible repayment terms and a focus on business growth, GetVantage empowers entrepreneurs to scale their businesses without compromising equity!
