# Revolving Loan Facility Explained: How Does It Work?

![Revolving Loan Facility: A form of credit issued by a financial institution that the borrower can draw from and pay back multiple times.](https://www.investopedia.com/thmb/uCbODPO3uxPiqlrwqPjqqZk5dsE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/revolving-loan-facility.asp-Final-476e560d7afc43e7896d48f74707f47f.jpg)

*— Investopedia / Yurle Villegas*

## What Is a Revolving Loan Facility?

A revolving loan facility, often referred to as a revolver or revolving credit facility, offers businesses flexible access to funds by allowing them to draw, repay, and withdraw again throughout an agreed term. Unlike [term loans](https://www.investopedia.com/terms/t/termloan.asp), which require repayment on a fixed schedule, revolving loans provide continual access to credit, enabling businesses to manage fluctuating cash flows more effectively. With the ability to repay and re-borrow as needs change, a revolving loan is a valuable financing solution for businesses seeking to stabilize their financial operations.

### Key Takeaways

*   A revolving loan facility allows businesses to draw, repay, and re-borrow funds as needed, making it a flexible financing option compared to traditional term loans.
*   These loans feature variable interest rates that can rise or fall with market conditions, often leading to higher rates than those for fixed-term loans.
*   Businesses use revolving loan facilities to fund working capital needs, manage cash flow fluctuations, and handle unexpected expenses.
*   Annual reviews by financial institutions can lead to changes in the terms or availability of the loan, based on the borrower's financial health.
*   Interest is charged on the borrowed amount, similar to other loans, but borrowers have the flexibility to continuously access funds up to their credit limit.

## Understanding the Mechanics of a Revolving Loan Facility

A revolving loan facility is typically a variable line of credit used by public and private businesses. The line is variable because the interest rate on the credit line can fluctuate. In other words, if interest rates rise in the credit markets, a bank might increase the rate on a variable-rate loan. The rate is often higher than rates charged on other loans and changes with the [prime rate](https://www.investopedia.com/terms/p/primerate.asp) or another market indicator. The financial institution typically charges a fee for extending the loan.

Criteria for approval of the loan depend on the stage, size, and industry in which the business operates. The bank usually reviews financial documents like income statements, [cash flow statements](https://www.investopedia.com/terms/c/cashflowstatement.asp), and balance sheets to decide if the business can repay the loan.

A loan is more likely to be approved if the company shows steady income, strong cash reserves, and a good credit score. The balance on a revolving loan facility may move between zero and the maximum approved value.

## Practical Applications of Revolving Loan Facilities for Businesses

A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations. A revolving line is useful during revenue fluctuations because it allows payment for bills and unexpected expenses using the credit line. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance.

The bank may review the loan annually and reduce the maximum loan amount if the [company's revenue decreases](https://www.investopedia.com/business-loans-with-low-revenue-7484926). Therefore, it is important for the business owner to discuss the company’s circumstances with the financial institution to avoid a reduction in or termination of the loan.

> **Important**
>
> A revolving loan facility provides a variable line of credit that allows people or businesses great flexibility with the funds they are borrowing.

## Example of a Revolving Loan Facility

Supreme Packaging secures a revolving loan facility for $500,000. The company uses the credit line for covering payroll as it waits for [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp) payments. Although the business uses up to $250,000 of the revolving loan facility each month, it pays off most of the balance and monitors how much available credit remains. Because another company signed a $500,000 contract for Supreme Packaging to package its products for the next five years, the packaging company is using $200,000 of its revolving loan facility for purchasing the required machinery.

## How Long Do You Have to Repay a Revolving Loan Facility?

Unlike a term loan with fixed payments, a revolving loan facility has no set term. Companies can withdraw funds as needed, reduce the available credit, and then repay to replenish their credit line.

## Are all Revolving Loan Facilities for Businesses?

For the purposes of this article, yes, they are limited to businesses. Home equity lines of credit or personal lines of credit operate on the same principles for personal use.

## Do You Pay Interest on a Revolving Loan Facility?

Yes, a revolving loan works like other loans, but lets you borrow as needed, repay, and borrow again instead of getting a lump sum.

## The Bottom Line

For businesses with fluctuating income, a revolving loan facility is useful for covering payroll or unexpected expenses. Establishing a revolving loan facility with your bank could be a wise move for your business.  

> **Article Sources**
>
> 1.  Cornell Law School. "[Revolving Credit Facility](https://www.law.cornell.edu/wex/revolving_credit_facility)."