What is a Non-Revolving Bank Facility?
A non-revolving bank facility is a specific form of lending agreement between a bank and a company. Under this arrangement, the company is allowed to make drawdowns—withdraw funds—during a predetermined period. The facility generally provides flexibility regarding the amount and timing of these withdrawals. However, once an amount is drawn, it takes on the characteristics of a term loan, meaning the borrowed sum must be repaid over a specified timeframe, typically with interest.
Key Characteristics:
- Predefined Drawdown Period: The company can make drawdowns within an agreed period, often several years.
- Flexibility: Companies have flexibility with the amount and timing of funds’ withdrawal.
- Term Loan Characteristics: Once funds are drawn, they must be repaid like a traditional term loan, usually in installments over a set period.
- Non-Replenishable: Unlike revolving credit facilities, once a portion of the funds is drawn, it cannot be re-borrowed after repayment.
Examples
- Construction Financing: A construction company secures a non-revolving bank facility to fund various stages of a building project. They draw the funds as certain construction milestones are met.
- Expansion Projects: A manufacturing company might use a non-revolving bank facility to fund the purchase of new machinery. They draw the necessary funds when equipment payments are due.
Frequently Asked Questions (FAQs)
1. How does a non-revolving bank facility differ from a revolving credit facility?
A non-revolving bank facility allows for drawdowns that cannot be re-borrowed once repaid, while a revolving credit facility permits re-borrowing of funds as long as the overall credit limit is not exceeded.
2. What happens if a company does not draw the entire amount available under a non-revolving bank facility?
If the company does not draw the full amount within the established drawdown period, the undrawn funds typically become inaccessible.
3. Can the drawdown period be extended?
The extension of the drawdown period depends on the terms and negotiations between the company and the lender. Amendments may be possible but often require re-evaluation.
4. Is the interest rate on a non-revolving bank facility fixed or variable?
Interest rates can be either fixed or variable, depending on the terms specified in the loan agreement.
5. What are the typical covenants associated with non-revolving bank facilities?
Covenants could include financial ratios to be maintained, restrictions on additional borrowing, or requirements for regular financial disclosures to the lender.
1. Term Loan
A loan from a bank for a specific amount with a specified repayment schedule and a fixed or floating interest rate.
2. Revolving Credit Facility
A type of credit that replenishes as funds are repaid, allowing the borrower to use and repay repeatedly up to the agreed credit limit.
3. Drawdown
The act of accessing funds previously agreed upon in a loan or credit facility.
Online References
- Investopedia - Term Loan
- The Balance - What Is a Revolving Credit Facility?
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Banking and Financial Institutions” by Benton E. Gup and James W. Kolari
- “Financial Management: Theory & Practice” by Eugene F. Brigham and Michael C. Ehrhardt
Accounting Basics: Non-Revolving Bank Facility Fundamentals Quiz
### When can a company make drawdowns from a non-revolving bank facility?
- [x] During a predefined period
- [ ] Anytime throughout the life of the loan
- [ ] Only at the onset of the loan
- [ ] Only upon request by the lender
> **Explanation:** The company can make drawdowns within the predefined period specified in the loan agreement.
### What happens to the withdrawn amount from a non-revolving bank facility?
- [ ] It becomes a line of credit.
- [x] It takes on the characteristics of a term loan.
- [ ] It needs to be repaid immediately.
- [ ] It can be re-borrowed after repayment.
> **Explanation:** Once funds are drawn from a non-revolving bank facility, they function like a term loan, with repayments typically scheduled over a set period.
### Can the undrawn funds in a non-revolving bank facility be accessed after the drawdown period?
- [ ] Yes, anytime as needed.
- [ ] Only with lender permission.
- [ ] Only within one year after the period ends.
- [x] No, they become inaccessible after the drawdown period.
> **Explanation:** The undrawn funds typically become inaccessible once the drawdown period ends, as per the terms of the non-revolving bank facility.
### What distinguishes a non-revolving from a revolving credit facility?
- [x] Non-revolving facilities do not allow for borrowing of repaid amounts.
- [ ] Non-revolving facilities replenish the funds automatically.
- [ ] Both types allow continuous drawdowns.
- [ ] Non-revolving facilities have no interest rate.
> **Explanation:** Non-revolving facilities do not permit re-borrowing of funds once they are repaid, unlike revolving credit facilities.
### What typically happens if a company does not fully draw down its non-revolving bank facility?
- [ ] Funds remain available indefinitely.
- [ ] Funds are converted to a different loan.
- [x] Undrawn funds become inaccessible.
- [ ] The facility converts to a revolving credit facility.
> **Explanation:** Any undrawn amount usually becomes inaccessible after the drawdown period ends.
### Can the interest rates on a non-revolving bank facility vary?
- [x] Yes, depending on the loan agreement.
- [ ] No, they are always fixed.
- [ ] Only if the lender agrees.
- [ ] They vary monthly regardless of the terms.
> **Explanation:** Interest rates can be fixed or variable depending on the terms agreed upon in the loan agreement.
### Which projects are typically suitable for a non-revolving bank facility?
- [ ] Short-term operational needs
- [x] Long-term capital projects
- [ ] Personal expenses
- [ ] Vehicle financing
> **Explanation:** Non-revolving bank facilities are often used for long-term capital projects, such as construction or major expansion.
### What must a company consider regarding the drawdown period?
- [x] The predefined timeframe in which they can withdraw funds
- [ ] The ability to draw funds any time during the loan term
- [ ] That it affects personal credit score
- [ ] That the period is irrelevant to repayments
> **Explanation:** The drawdown period is a predefined timeframe in which the company can withdraw the agreed funds.
### Can a non-revolving bank facility be converted into a revolving credit facility?
- [ ] Always, after a year
- [ ] Only when fully drawn
- [ ] Automatically at term end
- [x] Typically, no unless renegotiated with the bank
> **Explanation:** Generally, a non-revolving bank facility cannot be converted into a revolving credit facility unless renegotiated with the lender.
### Who decides the flexibility of drawdowns in a non-revolving bank facility?
- [ ] Federal Reserve
- [x] Loan agreement terms
- [ ] Company alone
- [ ] Market conditions
> **Explanation:** The flexibility regarding the amount and timing of drawdowns is determined by the terms specified in the loan agreement.
Thank you for exploring the intricacies of non-revolving bank facilities with us. Keep enhancing your financial knowledge for better decision-making and strategic planning.
