Definition
A revolving bank facility is a type of loan agreement extended by a bank or a group of banks to a company. It grants the company the flexibility to borrow, repay, and re-borrow funds within a specified credit limit. The main characteristic of a revolving bank facility is that the company can control the timing and amount of each drawdown and repayment, which provides significant operational flexibility. The facility can be structured as a bilateral bank facility or a syndicated bank facility. It is particularly useful for managing cash flow fluctuations or short-term liquidity needs.
Examples
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Corporate Working Capital Management:
- A manufacturing company uses a revolving bank facility to manage its working capital. During times of high inventory build-up, it can draw funds from the facility. Once it sells the inventory and collects receivables, it repays the loan.
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Project Financing:
- A construction firm secures a revolving credit line to finance various stages of a long-term project. As milestones are achieved and funds are released from investors or clients, the firm repays the borrowed amount, maintaining a manageable debt load.
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Seasonal Business:
- A retail business facing seasonal sales fluctuations utilizes a revolving bank facility to cover periods of low cash flow during the off-season and repays it during the peak sales season.
Frequently Asked Questions (FAQs)
What is the difference between a revolving bank facility and a term loan?
- Revolving Bank Facility: Allows continuous borrowing and repayment within a set credit limit over the loan term.
- Term Loan: Involves a lump sum disbursement at the start with fixed repayment schedules and no opportunity to re-borrow repaid amounts.
How does a syndicated bank facility differ from a bilateral bank facility?
- Syndicated Bank Facility: Involves multiple banks providing the loan, thus spreading risk among lenders.
- Bilateral Bank Facility: Involves a loan agreement between a single bank and the borrower.
Can the company use the revolved credit for any type of expenses?
- Typically, the use of the credit line is subject to conditions set in the loan agreement, which may include restrictions on certain types of expenditures.
How do interest rates work on a revolving bank facility?
- Interest is usually charged only on the drawn (borrowed) amounts, not on the undrawn portion of the facility.
Are revolving bank facility terms fixed?
- Terms and conditions, including the facility limit and repayment terms, are typically agreed upon in advance but can be renegotiated based on the borrower’s needs and financial status.
Related Terms
- Drawdown: The act of utilizing funds from the loan facility.
- Committed Facility: A loan arrangement in which the lender agrees to provide a specified amount of credit over a designated period, subject to terms and conditions.
- Bilateral Bank Facility: A loan agreement between one bank and the borrower.
- Syndicated Bank Facility: A loan agreement where multiple banks share the lending risk by providing portions of the overall credit.
Online References
- Investopedia: Revolving Loan Facility
- Corporate Finance Institute (CFI): Revolving Credit Facility
- The Balance: What is a Revolving Line of Credit?
Suggested Books for Further Studies
- Corporate Finance by Jonathan Berk and Peter DeMarzo - For an in-depth understanding of corporate financial structures, including revolving credit.
- Financial Management: Principles and Applications by Sheridan Titman, Arthur J. Keown, and John D. Martin - Covers various aspects of financial management, including loan facilities.
- Banking and Financial Markets by Lloyd Thomas and Sangkyun Park - Provides insights into banking products, including revolving credit facilities.
Accounting Basics: “Revolving Bank Facility” Fundamentals Quiz
### What flexibility does a revolving bank facility provide to the borrower?
- [x] The ability to draw, repay, and re-borrow funds within the credit limit.
- [ ] Funds must be utilized in a single drawdown.
- [ ] There is no flexibility; repayment terms are fixed.
- [ ] Only allows a single repayment at the end of the term.
> **Explanation:** A revolving bank facility allows continuous borrowing, repayment, and re-borrowing up to the specified credit limit, offering significant flexibility to the borrower.
### How do interest charges typically work in a revolving bank facility?
- [ ] Interest is charged on the entire credit limit.
- [ ] Interest has to be paid upfront regardless of drawdown.
- [x] Interest is charged only on the drawn amounts.
- [ ] Interest is waived for the first six months.
> **Explanation:** Interest in a revolving bank facility is usually charged only on the actual drawn amounts, not on the undrawn portion of the credit line.
### Which of the following best characterizes a syndicated bank facility?
- [ ] It involves a single bank providing the loan.
- [x] Multiple banks participate in providing the loan.
- [ ] It requires repayments with no option to redraw.
- [ ] It is generally used for personal loans.
> **Explanation:** A syndicated bank facility involves multiple banks sharing the risk by collectively providing the loan to the borrower.
### In what scenario might a company use a revolving bank facility?
- [x] To manage seasonal fluctuations in cash flow.
- [ ] To finance a one-time large capital expenditure.
- [ ] When they have surplus cash reserves.
- [ ] To avoid borrowing funds.
> **Explanation:** A revolving bank facility is ideal for managing liquidity during seasonal fluctuations, allowing companies to draw and repay funds as needed.
### What is a bilateral bank facility?
- [x] A loan agreement between a single bank and the borrower.
- [ ] A loan involving multiple banks syndicating together.
- [ ] A requirement for borrowers to use funds only for capital investments.
- [ ] A facility requiring daily repayment.
> **Explanation:** A bilateral bank facility is an arrangement between one bank and the borrower.
### What does the term "drawdown" refer to in the context of a revolving bank facility?
- [x] The act of using available credit funds.
- [ ] Repayment of the loan amount.
- [ ] The total loan sum disbursed upfront.
- [ ] The maturity date of the loan.
> **Explanation:** "Drawdown" refers to the borrower taking out or utilizing funds from the revolving credit facility.
### What benefit does a revolving bank facility offer in terms of cash flow management?
- [ ] Limited borrowing options.
- [x] Flexibility in accessing funds as needed.
- [ ] Fixed monthly repayment schedules without flexibility.
- [ ] Increased interest rates over time.
> **Explanation:** The facility provides flexibility in accessing funds, making it easier to manage cash flow fluctuations by borrowing when needed and repaying when possible.
### Under which condition can a company re-borrow repaid amounts in a revolving bank facility?
- [x] Upon fulfilling the conditions set in the loan agreement.
- [ ] Only after the loan term ends.
- [ ] Whenever they require funds, without any conditions.
- [ ] There is no option to re-borrow repaid amounts.
> **Explanation:** Companies can re-borrow repaid amounts as long as they meet the conditions specified in the loan agreement, such as maintaining certain financial ratios.
### What type of interest rate is typically applied to revolving credit facilities?
- [ ] Fixed interest rate for the entire term.
- [x] Variable interest rate based on market conditions.
- [ ] No interest is charged.
- [ ] Penalty interest rate after initial period.
> **Explanation:** Revolving credit facilities often have variable interest rates which adjust based on market conditions, adding to the flexibility of these loans.
### Which business scenario might find a revolving bank facility especially useful?
- [x] A growing business with unpredictable cash flow needs.
- [ ] A business with steady, predictable income.
- [ ] A startup requiring significant initial capital investment.
- [ ] An enterprise purchasing fixed assets.
> **Explanation:** A revolving bank facility is particularly beneficial for businesses experiencing unpredictable cash flow needs, as it provides the flexibility to draw and repay funds as necessary.
Thank you for exploring the detailed aspects of revolving bank facilities and enhancing your understanding through our structured quiz. Keep striving for excellence in your financial knowledge!
