Revolving Credit Facility
How much does a revolving credit facility cost?
Firstly, what is a revolving credit facility? This is a credit line set up between a bank and a company. It has a set maximum amount, and the company can use the cash whenever it is needed. A revolving credit facility is sometimes known as an operating line, a bank line, or simply a revolver. Revolving credit, also known as a revolving account or a line of credit, is an open-ended, flexible loan with no set number of payments. Revolving credit, unlike installment loans, allows you to renew your credit as your bills are paid off. The most prevalent kind of revolving credit utilized by consumers is credit cards.
Full-service bank accounts, like revolving credit facilities, include a transaction account, an overdraft facility, and loans. For day-to-day operations, a revolving credit line is ideal, especially if your company’s cash flow is erratic and you have unexpectedly high expenditures. Consequently, it’s often viewed as a short-term loan that’s quickly paid back. To determine a company’s creditworthiness, a bank examines a variety of factors, including the company’s assets and liabilities. They include the income statement, the cash flow statement, and the balance sheet statement.
So how much does a revolving credit facility cost?
Calculation of RCF
To find out how much a revolving credit facility costs, we must set out how you calculate one. A revolving credit facility is a type of flexible finance that allows a company to borrow money up to a certain level. The RCF is used to support a company’s short-term cash swings, such as operating working capital seasonality. A revolver is another name for a revolving credit arrangement. Assume a company has an RCF of £10 million. It is experiencing a delay in collecting accounts receivables and needs £5 million in cash to meet working capital requirements such as payroll. The company can take out £5 million from its RCF. This will bring its RCF down to £5 million (10-5). It may reimburse the bank after it receives cash from its consumers. Its RCF will be restored to £10 million.
An RCF has a maximum borrowing limit that is determined by a company’s credit history and cash flow strength. Banks may examine an RCF’s maximum limit and increase or lower it based on the risk of default. An RCF, like any other credit line, requires companies to pay interest. The interest is calculated on the amount withdrawn, not the maximum amount. If a bank provides an RCF of £50 million, it does not always mean that the monies have been transferred to the borrower. It should, however, have the funds available if the borrower requests it. As part of regulatory obligations, banks must deploy equity capital to satisfy such future demand for cash. So how much does a revolving credit facility cost?
As a result, banks levy a commitment fee on RCFs. If the RCF isn’t used, the commitment fee allows them to obtain a return on the equity money they put into it. The commitment costs are applied to the percentage of the RCF that has not been used.
Example of RCF
Assume ABC Company obtained a £50,000 revolving credit arrangement from RVS Commercial Bank in 2015. They intended to grow their business by purchasing a piece of new equipment for their manufacturing facility. So, in 2015, they borrowed £20,000, which had to be paid back within three months. That is why it was classified as short-term debt. Suppose revolving credit took up £25,000 from the same bank in the year of 2016, with payment due 90 days after borrowing. Is the revolving credit facility cost, worth the loan?
As a result, the revolving credit was included in the short-term debt in this situation as well. If the application for a Business RCF is accepted, it will be given a facility limit. A £50,000 facility limit, for example, means you can withdraw up to £50,000. Financial requirements may alter as your company or farm expands. A revolving credit facility can help you manage your cash flow and take advantage of new possibilities by providing you with continuous access to the funds you require. It is a line of credit that allows a firm to withdraw money, return them, and then withdraw them again if necessary.
RCF has a pre-determined borrowing limit that is based on a company’s creditworthiness. On RCF, credit companies charge interest on the amount borrowed as well as commitment fees. Even if borrowers do not use the RCF, the commitment fee compensates banks for the equity allocated to support it. The amount of cash flows available to a firm affects the balance in the RCF and the unused facility.
Conclusion
It’s important to use the right financial product in the right situation, just like with any other financial product. In the event of a short-term cash flow shortage, revolving credit facilities are an excellent option. In the long term, you should not use them to buy an asset and spread the cost. For these purposes, a business loan would be preferable. This is reflected in the cost of revolving credit facilities, so the cost of credit is very competitive as long as it is used properly.
A revolving credit facility is similar to a full-service bank account that includes a transaction account, overdraft, and loan facility. A revolving credit line is best used for day-to-day operations, especially if your company’s cash flow is volatile and you have some unanticipated significant costs. As a result, it is frequently seen as a kind of short-term borrowing that is typically repaid promptly. When a firm asks for a revolver, a bank looks at a number of variables to assess the company’s creditworthiness. The income statement, cash flow statement, and balance sheet statement are among them.
Get in touch with the Funding Bay team to learn more about Revolving Credit Facilities and how they can help your business. We work with a roster of lenders who can offer a revolving credit facility, including iwoca, Just Cashflow or FIBR, just to name a few.
