Revolving Credit Facility

Some cash gaps have a rhythm: a business needs funds every few months and can repay a few months later, at amounts that vary with the season, the order book, the trade cycle. A term loan is too rigid for that shape — it disburses once and demands amortisation whether the cash is needed or not. An overdraft is too small and too callable. A revolving credit facility is built for the rhythm itself: a ceiling within which the client draws, repays, and redraws freely, paying interest on what is used and a commitment fee on what is held ready.

The product's essence is optionality. The client is not buying money; they are buying the certainty that money will be there at the moment it is needed — which is what lets a business accept the larger order, build the seasonal stock, move when the opportunity is brief. That certainty has real value, and it has a real cost on both sides of the table: the client pays for it through the fee structure, and the bank carries capital and funding against a limit that may be drawn at any time.

This is why a desk reads an RCF differently from a term loan. A term loan's risk is set on day one and declines. A revolver's exposure is decided by the borrower, continuously, for the life of the facility — so the real underwriting question is not “what limit today?” but “how will this line be used across the next two years?”

Nine dimensions define any revolving facility. Two of them exist in no other lending product.

The limit — the number the client cares about, and the line the desk has to place correctly: too high grants unpriced optionality and parks the bank's capital; too low strands the client at peak and pushes them into emergency overdrafts. A common sizing discipline is expected peak need plus a buffer, sanity-checked against what the cash conversion cycle says the business actually absorbs. The drawn rate — floating over a base rate, typically priced above an equivalent term loan because callable money is worth more than committed money. The commitment fee — unique to committed revolving facilities: a charge on the undrawn balance, because the bank's promise to fund is itself a cost. Tenor and annual review — commonly one to three years, with a yearly right to re-look at limit, margin, and covenants: the bank's main protective mechanism, and the reason an RCF is “softer” than a term loan in both directions.

Then the plumbing: drawdown mechanics (minimum amounts, notice periods, rollover rules); permitted purpose — working capital only, with capital expenditure and acquisitions expressly excluded, because permanent uses belong in permanent products; security — commonly a general security agreement plus receivables, sometimes a borrowing base that ties the drawable amount to eligible debtors and stock; covenants, usually tested quarterly; and the second unique feature, the clean-down, which gets its own section because it is the soul of the product.

An RCF has no single interest rate. The true cost runs on two rails — drawn balance times the drawn rate, plus undrawn balance times the commitment fee — which means the effective rate depends entirely on utilization. A constructed illustration, with every figure invented for teaching: a NZ$2.0m committed limit, a 7.50% drawn rate, a 0.75% commitment fee, held for one year.

Read the last column. At half utilization the client's effective rate on money actually used is 8.25% — against, say, 6.50% for a comparable term loan of NZ$1.0m in the same grade. The difference is not the bank being greedy twice; it is the price of “I can borrow more, instantly, without asking.” A borrower who will genuinely use that option is buying something real. A borrower who will not is paying an insurance premium on a risk they do not have — and a banker who cannot walk a client through this table before signing has set up next year's difficult conversation.

The story of a revolving facility is not in the approval — it is in the utilization curve, and a desk reads the shape of the last twenty-four months the way a doctor reads a chart. Four shapes cover most of what you will ever see. Seasonal swing: regular waves — up to 60-70% in the peak, back near zero in the trough. Healthy; this is what the product is for. Project spikes: sharp climbs when a large order lands, sharp falls when it pays. Healthy, provided every spike comes back down — each descent is the self-liquidation proving itself. The plateau: parked at 40% for a year, no spikes, no clean-down. It looks stable and it is the quiet failure: the revolver has become a disguised term loan, and the honest response is to say so and restructure — a smaller line plus a term loan for the permanent core. The creep: 20% to 98% over two years with no retreat. This is the dangerous one, and it is usually the numbers announcing a deterioration six to twelve months before the borrower does — debtors stretching, stock building, margin leaking — because the drawn balance is where all three land first.

Behind the shapes sits the risk unique to committed lines: adverse selection. The moment a client most needs to draw in full is often precisely the moment the bank would least choose to lend — when trading worsens and other banks tighten, the committed line is the one that cannot say no. Every protective mechanism on this page — the clean-down, the quarterly covenants, the annual review, the utilization triggers — exists to shrink that window. And the desk-level version of the same risk: clients with lines at several banks will draw hardest on the slowest bank to react, so a lender watching only its own book learns the news last.

The clean-down is the test that holds it all together: a requirement to return the balance to zero, or a low watermark, for a continuous run of days — commonly around thirty — each year. Not ritual; evidence. A genuinely revolving cash cycle passes through a natural low annually, so a business that cannot clean down has told the bank, in data, that the need is permanent — and permanent needs are priced, structured and covenanted as term debt, not carried indefinitely on a working capital line.

The purpose slide. “Can I use the line to fit out the new office?” A casual yes puts a permanent asset on revolving money and usually breaches the permitted-purpose clause. The discipline is a one-line sorting rule: recurring and self-reversing needs on the revolver; permanent occupation in a term product.

The headline-rate quote. A client told “7.5%” who runs at 25% utilization is actually paying 9.75% on drawn funds, and will discover it on the first invoice. The all-in table above is the honest quote, and the trust it spends early is repaid for the life of the relationship.

Mistaking the plateau for stability. A flat 45% looks like a well-behaved client and is actually a term loan wearing the wrong clothes — cheaper products exist for permanent needs, and the annual review that just rolls the facility over unexamined has skipped its entire job.

Committed and uncommitted, unclarified. An uncommitted line can be declined at the moment of drawdown — the bank keeps that right, prices the line cheaper for it, and a client who plans as if the money were committed finds out at the worst possible time. The difference belongs in the first conversation, not the fine print.

The unwatched jump. Utilization that leaps thirty points in a month, or holds above 80% for a quarter, is among the earliest warning signals a portfolio produces — earlier than covenants, far earlier than the accounts. A desk that sets triggers on the curve hears about trouble first; one that reads utilization annually hears about it from the administrator.

Every working capital drill on this site is, underneath, a revolving-facility judgment. Issue 01 is a revolver increase that would fund a deterioration; Issue 04 is the same request where the cycle held and the disciplined answer is a fast, full yes; Issue 06 is a seasonal limit asked to fund a merchandising conviction, clean-down covenant and all. The sizing arithmetic behind every one of them is the cash conversion cycle, and the terms of art are in the glossary. For the borrower's side of this table — what the bank is weighing when you ask for a line — read How Banks Read You.