revolving credit facility (2024)

FAQs

Revolving credit facility? ›

A revolving credit facility enables you to withdraw money, use it to fund your business, repay it and then withdraw it again when you need it. It's a flexible form of funding that gives you access to a pre-approved line of credit, which you are able to use and repay on a recurring basis.

Common examples of revolving credit include credit cards, home equity lines of credit (HELOCs), and personal and business lines of credit. Credit cards are the best-known type of revolving credit. However, there are numerous differences between a revolving line of credit and a consumer or business credit card.

The main risk to revolving credit is taking on more debt than you can repay. Luckily, you can avoid debt problems by always repaying what you borrow in full every month. You should also avoid making only the minimum payments on credit cards or lines of credit because that will keep you indebted forever.

Unlike a term loan which has a fixed repayment schedule, an RCF is much more flexible arrangement, for two keys reasons. Firstly, it allows the borrower the ability to draw down funds, repay, and then withdraw again, hence the term 'revolving'.

With revolving credit, you only pay interest for the money you use. You'll only be charged for the days you withdraw funding rather than for the total amount of credit, such as you'd find with term loans.

Revolving credit, particularly credit cards, can certainly hurt your credit score if not used wisely. However, having credit cards can be great for your score if you pay attention to your credit utilization and credit mix while building a positive credit history.

A term loan involves borrowing a fixed amount of money, repaying this sum with interest over a specified term. Conversely, a revolving credit facility operates similarly to a credit card. This affords businesses a credit limit that they can borrow against, repay and borrow again.

This means that if you want continuous access to the money you borrowed, a revolving loan may be better suited to your needs. If you only need a once-off amount for a specific purpose, a personal loan may be the best option for you.

This type of loan is named a revolver because once the outstanding amount is paid off, the borrower can use it over and over again. It's a revolving cycle of withdrawing, spending, and repaying any number of times until the arrangement expires – the term of the revolver ends.

Don't use more than 30% of available credit: To maintain healthy credit scores, avoid using too much of your available credit. Don't apply for too much credit at once: If you're going to apply for another credit card, wait six months between applications to give credit scores time to bounce back.

Do you pay interest on RCF? ›

Borrowers only pay for the amount they use. If they draw down half of their available funds, they will only pay interest on that amount.

A revolving credit facility (RCF) is a flexible funding facility which can be drawn down by a business subject to a pre-agreed limit. The RCF is used to support a business's short term cash fluctuations such as seasonality of operating working capital (OWC).

Revolving credit facilities are more suitable for short term financing needs. Term loans can be better suited for longer term financing needs where a fixed amount of funding is required upfront.

Revolving credit or revolving accounts function by giving you the choice to withdraw funds multiple times until you reach a set limit (or your credit limit). You decide how much money you borrow and how much your repayments will be, beyond the minimum payment requirements.

The fair value of the revolving credit facility is equal to its carrying value as the Company has the ability to repay the outstanding principal at par value at any time.

Revolving credit is a line of credit that remains available over time, even if you pay the full balance. Credit cards are a common source of revolving credit, as are personal lines of credit.

For instance, a Revolving LC is granted INR 120,000 over six months for products costing INR 20,000 each month. Each month, the exporter is limited to shipping and collecting payment for only INR 20,000 worth of products.

Revolving Interest Example

Let's say your principal balance is $10,000 from June 1 - 15 and your interest rate is 40%. Multiply 10,000 by 0.4, then multiply by 15 (days) and divide by 365. The interest fee for those 15 days is $164.38.