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Sometimes companies require a line of credit that does not have a definite pay-off date. Revolving credit is most commonly associated with a company’s current cash flow and change on a regular basis. A revolving credit facility is useful for unpredictable peaks and troughs in requirements and usually allows borrowing and repayment on a very flexible basis, rarely if ever employing early repayment fees.
Of all credit facilities, revolving credit usually offers the most relaxed loan conditions. Often this means that the actualized limit of the facility will be significantly lower than other subcategories of credit facility but revolving credit’s usages are such that this is rarely a drawback.
The contract of a revolving credit facility is an agreement that the financial institution will lend sums to the company that are not predefined and with little or no notice period for the duration of the facility. Such contracts routinely relieve companies of early repayment fees that they may be liable for with other types of facility. The company will however often agree to make one upfront or indeed regular commitment payments to the bank.
A common example of a company suddenly drawing down funds from a revolving credit facility is in response to an unforeseen lull in cash flow. Perhaps payroll must be satisfied or stock needs to be purchased and the company does not currently have the funds to do so, for example because of a delayed payment from a client or customer; drawing the funds from their revolving credit facility, the company will be able to pay its staff or pay for the goods and then repay the loan a short time in the future when the issue at hand has been resolved – all without suffering the negotiation of a new loan agreement and/or early repayment fees.
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The interest rates and payments for a revolving credit facility depend largely on whether or not the facility is secured or unsecured. If the facility is secured (i.e. collateral provided by a company asset), usually lower fees and rates will be agreed whereas an unsecured facility is considered higher risk and likely to attract higher rates/larger upfront commitment payments.
As with any facility agreement, the relationship the company has with the financial institution along with its financial history will greatly affect the terms. Usually, regular interest payments are required to be paid by the company, which of course relate to the outstanding loan amount at any given time. The dates of the payments for revolving credit facilities are usually highly flexible however and may well change during the facility’s lifetime.
As a rule, revolving credit facilities are safety nets for businesses. They are designed to be used when a company has cash flow problems rather than as a regular or semi-permanent solution. Lenders like to see revolving credit facilities paid off regularly and being used responsibly as the buffers they are intended to be. The management of these facilities is a great responsibility, as they are rarely monitored by the lender and so tend to be overseen by a person of high authority, such as a chief financial officer.