Revolving credit

What it means

A revolving credit is a facility that becomes available again as it is repaid. The company draws as needed and pays interest only on the drawn amount, plus a fee on the committed undrawn part.

It differs from an overdraft in being drawn in tranches with agreed maturities rather than automatically going negative on the current account.

A revolving facility is usually granted for a limited period, often a year, and the bank then renews it on the company’s current figures. It is not a permanent source like an investment loan with a fixed repayment schedule: in a weaker year the limit can be cut or not renewed just when the company needs it most.

How it works in practice

It funds working capital: buying stock before a season, bridging customers’ long payment terms, paying wages before a large invoice is collected.

Banks usually tie the facility to covenants: debt to EBITDA, liquidity, equity. Breaching them means renegotiated terms, not automatic continuation.

With a revolver the bank typically wants interim statements, often quarterly, and a calculation of the agreed covenants. We prepare them from the same close as the internal reporting, so the bank and management do not see two sets of numbers and a looming breach shows up before the bank finds it.

What to watch out for

A permanently drawn revolver stops being a short-term tool and becomes hidden long-term debt. If the facility is never repaid, operations are not generating enough cash.

The second mistake is buying a machine or a property with the revolver. Long-term assets pay back from years of earnings, while the facility renews piecemeal and the bank can reduce it; the company then has to refinance at the worst moment, with drawings high and results weak.