A revolving credit facility is basically a line of credit that is arranged between a business and a bank. There is a maximum amount limit and the business can have access to funds at any time. The form of credit is suitable for operating purposes or when a business experiences a sharp fluctuation in the cash flow. In other words, a revolving credit facility is required for those companies which have low cash balance for their working capital needs. Whenever the company applies for a credit facility, the bank will consider the creditworthiness of the company before accepting the request.
Features of a revolving credit facility
- Interest expense: A borrower will be charged an interest based on the amount withdrawn and not on the entire line of credit. The balance is always ready for use. This feature provides flexibility and convenience to the business. With regard to the outstanding balance, the business can make monthly payments or pay the entire amount at once.
- Cash Sweep: A revolving credit facility is also known as a cash sweep provision. It means that any excess free cash flow that is generated by a company will be used by the bank in order to pay the outstanding debt of the revolving institution. You can meet the growing demand of fund in a company through credit facility from art penn pennantpark. By doing this, the company will make repayment at a faster rate and it will minimize the credit risk which comes from a company that is using cash reserves for other expenses.
- Commitment fee: In order to commence the loan, the lender may charge a commitment fee. It will compensate the lender for allowing open access to the loan where interest payments will only activate after the amount is drawn.
- Maximum amount: Many times a company experiences a shortfall in the cash flow and is unable to meet financial obligations. This can be immediately corrected by borrowing from a revolving institution. There is already a maximum amount set by the bank but it can review it each year. If the company has a good credit score and is generating high revenues, the bank may agree to increase the maximum limit.
- Reusability: The biggest advantage of the loan is that the borrower can use it over and over again. It is a cycle of withdrawing, spending and repaying as many times until the end of the term. Get insights about the importance of credit facility for business on arthur penn pennantpark. Revolving credit facility forms a significant part of the credit in business.
A revolving credit facility is a very important part of financial modeling because it allows the business to continue its operations when the revenues fall or in case of inadequate working capital. The revolving credit facility is highly preferred by business owners in the seasonal industry where they can make the most of the peak season with additional cash on hand. It allows the company to have access to funds at any time.