What is a revolving credit facility?
Short answer: A revolving credit facility, or revolver, lets a borrower draw, repay and usually redraw amounts up to an agreed limit during an availability period. It differs from a term loan because repayment normally restores availability. The legal commitment is not the same as usable liquidity: outstanding drawings, letters of credit, borrowing-base limits, conditions and defaults can reduce what can actually be drawn.
Revolvers often support working-capital swings, seasonal inventory, letters of credit or acquisition flexibility. Interest applies to drawings, while a commitment fee may apply to undrawn amounts. A swingline or overdraft sublimit can provide short-term access. The facility may be cash-flow based or limited by eligible collateral. Clean-down requirements may require drawings to fall below a threshold for a stated period. At expiry, outstanding amounts become due unless refinanced. Financial covenants, repeating representations and draw notices can constrain access precisely when performance weakens.
How it works
Create a daily or weekly liquidity schedule rather than treating the commitment as cash. Start with the lower of the contractual commitment and the borrowing base after reserves. Deduct drawings, letters of credit and other ancillary exposures; do not deduct reserves again if the borrowing base is already net of them. Check draw conditions, minimum notice and currency sublimits. Forecast interest from actual utilization and commitment fees from undrawn commitment using the contractual basis. Test peak drawings, seasonal repayment, clean-down and maturity under base and downside collections. Link covenant forecasts to each potential draw date because an unremedied default may stop new borrowing.
Available headroom = lesser of commitment and borrowing base after reserves - drawings - ancillary exposures
Example
A company has a revolving commitment of 5,000. Eligible receivables and inventory produce gross collateral availability of 2,600 before lender reserves. After a reserve of 150, the borrowing base is 2,450. Drawings are 1,400 and outstanding letters of credit are 250, so available headroom is the lesser of the 5,000 commitment and 2,450 borrowing base, less 1,400 and 250, which equals 800. In a downside case, gross collateral availability falls to 1,900. The net borrowing base becomes 1,750 after the reserve, leaving only 100 of headroom after drawings and letters of credit.
Why it matters
A revolver can absorb timing differences without repeatedly arranging new loans. Companies use it as a liquidity backstop, but persistent drawings may signal a permanent funding need better matched with term capital or equity. Boards should size it to a dated cash forecast and a downside buffer, then assess renewal risk and covenant headroom. Lenders focus on cash conversion, collateral quality, controls and the borrower's ability to reduce utilization. Acquisition facilities also use revolvers for post-closing liquidity, where reserving enough capacity can be as important as leverage.
Availability and lender obligations are governed by the signed facility. Material adverse change clauses, representations, sanctions, events of default and borrowing-base discretion can affect drawing. Letters of credit can consume commitment even without cash borrowing. Local law governs security, set-off and insolvency treatment. Accounting may require gross presentation and separate treatment of fees; classification as current or non-current depends on rights at the reporting date. Do not call undrawn commitment cash or assume renewal. Treasury should reconcile lender statements, notices and covenant certificates to its liquidity model.