Revolving Credit Facility

A revolving credit facility is a flexible credit line that can be drawn and repaid repeatedly. The company draws money only when needed and pays interest on the amount used. It mainly serves to balance short-term fluctuations in capital needs. A commitment fee applies to the undrawn portion, usually a share of the agreed margin, so unused availability also carries a cost.

Typical uses are seasonal working capital swings, pre-financing orders, bridging until larger invoices are paid and covering unforeseen liquidity needs. In acquisition financings such a facility is regularly provided alongside the term tranches and normally remains largely undrawn. It is the part of the financing that relationship banks take, while institutional investors hold the long-term tranches. That is precisely why credit agreements in otherwise covenant-light structures often attach a single maintenance test to drawings under this facility above a defined threshold, so that the working capital banks remain protected.

The revolving facility should be distinguished from an overdraft, which is shorter-term and more flexible but usually more expensive and terminable at any time, and from a bridge loan, which serves a single clearly defined purpose. Pricing usually has three components: an interest rate on amounts actually drawn, a commitment fee on the undrawn portion, typically a fraction of the margin, and a one-off arrangement fee. Loan agreements frequently include a clean-down clause requiring the facility to be fully repaid at set dates so that it is not used as permanent funding. In leveraged buyouts the facility is often earmarked not only for working capital but also for smaller acquisitions and capital expenditure, which needs to be expressly permitted in the agreement.