A revolving credit facility (commonly referred to as an "RCF") is one of the most frequently encountered financing products in the banking market. Unlike a term loan, where funds are advanced once and repaid in instalments over time or in a single amount at the end of its term, an RCF allows a borrower to draw, repay and redraw amounts throughout the availability period of the facility, provided the maximum facility size is not exceeded.
The flexibility of an RCF means it is often described as the corporate equivalent of an overdraft. However, whilst that comparison is useful at a high level, there are some key differences between a RCF and an overdraft (which we touch on below) and an RCF remains a sophisticated financing product governed by detailed loan documentation and ongoing borrower obligations.
A revolving credit facility is a “committed” lending facility under which a lender agrees to make funds available up to a specified limit during an agreed availability period, with the borrower paying a “commitment” fee to compensate lenders for keeping funds available during this period. By contrast, an overdraft is an “uncommitted” (aka discretionary) facility which carries no equivalent fee.
The defining feature of an RCF is that amounts repaid can generally be borrowed again up to the maximum facility limit during the term of the facility. In practice, utilisation periods are often relatively short (e.g. three months) and, when they expire, the borrower is required to pay accrued interest on the relevant RCF loan, repay the relevant RCF loan and it may (assuming any pre-agreed conditions are met) immediately re-draw the loan (commonly known as a “rollover”).
As a result, borrowers commonly use RCFs to manage day-to-day operations and fluctuations in working capital. The facility can be drawn when needed and repaid when surplus cash becomes available.
For example, a borrower may draw £5m under a £10m RCF to fund inventory purchases, repay part of that borrowing once customer receipts are collected, and subsequently redraw those amounts several months later.
