Revolving Loan Facility - Explained
What is a Revolving Loan Facility?
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Table of ContentsWhat is a Revolving Loan Facility?How Does a Revolving Loan Facility Work?How Do Businesses Use a Revolving Loan Facility?
What is a Revolving Loan Facility?
A revolving loan facility is a type of financial institution that offers loan flexibility to borrowers, it has a loan arrangement where borrowers can withdraw a loan amount, payback, then redraw again. A revolving loan or credit does not have a fixed number of payments, this means borrowers can redraw loan as many times as possible until the expiration of the agreement. The repayment schedule and ability of borrowers to redraw makes a revolving loan a flexible financing tool. Revolving credit provides liquidity for borrowers as many times as they need it during the term of the agreement.
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How Does a Revolving Loan Facility Work?
A revolving loan differs from a term loan because it offers borrowers the flexibility to draw down, repay and redraw loans as many times as possible. Overdrafts and credit card loans are examples of revolving loans. Both private and public businesses use the revolving loan arrangement to provide liquidity for their businesses. There are certain criteria that companies must meet before they can access a revolving loan. Typically, the financial institutions offering this type of loan will examine the statement of cash flows, balance sheet and income statement of the company before extending the loan. A revolving loan facility offers businesses or people flexibility with the borrowed funds, borrowers are charged a fee for the loan and also pay variable interest. The balance of the type of loan moves between zero and the maximum approved loan value.
How Do Businesses Use a Revolving Loan Facility?
Businesses that are in need of liquidity to fund their operations opt for a revolving loan facility. There are times when business becomes financially unstable and require to draw capital through debt financing. Drawing a loan in a revolving loan facility allows businesses recoup losses, pay expenses and regain financial stability. When financial institutions offer a revolving loan arrangement to companies, they can draw loans, make repayments and redraw again multiple times until the arrangement expires. Revolving loans are sometimes scheduled to reflect the time repayment must be made by the borrower before another loan can be accessed. The financial institution offering the revolving credit may also make annual or quarterly reviews.