What is 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 any borrowing base. Deduct loans, letters of credit, ancillary exposures and reserves. Check draw conditions, minimum notice and currency sublimits. Forecast interest from actual utilisation 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 - drawings - reserved or ancillary amounts
Example
A company has a 3,000 commitment. Its current borrowing base is 2,600, drawings are 1,400, outstanding letters of credit are 250 and lender reserves are 150. Usable headroom is 2,600 minus 1,400 minus 250 minus 150, or 800. If the borrowing base falls to 1,900 after receivables become ineligible, the same exposures leave only 100. If drawings then exceed permitted availability, the documents may require immediate repayment. The unused 1,600 shown against the headline commitment was never all available.
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 utilisation. 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.