A revolving credit (RC) is financing made available to a borrower by bank lenders up to a maximum amount that may be drawn down, repaid and re-drawn up to the preset limit over a fixed period until the end of the facility’s availability period. Revolving credit provide borrowers immediate liquidity to fund a company’s variable working capital needs, with the amount utilized depending on the borrower’s current cash flow requirements.
Each drawdown constitutes a new loan equal to its interest period, after which time it is repayable. The borrower pays interest only on the amount of credit actually utilized, while a periodic commitment fee is usually charged on the remaining amount that has not been drawn down. Lenders generally charge a commitment fee to reflect the need of banks to set aside capital to meet capital adequacy requirements.
Repayment in full may be made at any time or over time, subject to minimum payment requirements. They are commonly available for one to three years with a renewal (rollover) option. They may also be structured with a term-out feature. The clean down provision found in leveraged agreements is intended to ensure that the revolving credit is used only for working capital purposes, not permanent financing.