A revolving credit facility (RCF) is a committed loan agreement under which a bank or group of banks agrees to lend a company up to a set limit for a fixed period, usually three to five years. Within that limit the borrower can draw money, repay it and draw it again as often as it needs. Companies use RCFs to cover swings in working capital, to back up commercial paper programmes and to keep a reserve of liquidity for unexpected needs.
The RCF is the corporate, committed form of revolving credit, the wider family that also includes credit cards and personal lines of credit. It is often arranged alongside a term loan, which is drawn once and repaid on a schedule. Larger facilities are provided through loan syndication, and in Europe they are commonly documented on templates published by the Loan Market Association (LMA); in the United States the Loan Syndications and Trading Association (LSTA) plays a similar role.
Revolving credit facility in plain terms
Think of an RCF as a reservoir that a company's bank has agreed to keep filled to a certain level. When the company is short of cash, perhaps because customers are slow to pay or it needs to buy stock before a busy season, it opens the tap and takes what it needs. When cash comes back in, it pours the money back, and the reservoir is ready to be used again.
The company pays interest only on the water it has actually taken out. It pays a much smaller charge for the bank's promise to keep the rest available. Because the promise lasts for years, the company does not have to apply for a new loan each time it needs money, which is why many firms keep an RCF even when they rarely use it.
How a revolving credit facility works
The borrower draws money by sending a utilisation request, choosing an amount, a currency where several are allowed, and an interest period such as one, three or six months. At the end of each interest period the loan is either repaid or "rolled over" into a new one. Each drawing carries interest at a reference rate plus a margin. Since the end of LIBOR, the reference rate is usually a risk-free rate such as SOFR in US dollars or SONIA in sterling, or a term rate such as EURIBOR in euros.
Many RCFs also include a swingline, a small sub-limit that can be drawn the same day for short-term needs, and sub-limits for letters of credit or bank guarantees issued on the borrower's behalf. Some facilities include an "accordion" clause that lets the borrower increase the limit later if lenders agree. Facilities for weaker borrowers may be secured, with lending tied to a borrowing base of eligible receivables and inventory, and may sit in the senior secured debt layer of the capital structure.
Fees and pricing
An RCF has several charges. The arrangement fee is paid once at signing. The margin applies to drawn amounts and often steps up or down with a leverage or rating grid. The commitment fee compensates lenders for keeping undrawn money available, and is often quoted as a percentage of the margin. A utilisation fee may apply when drawings exceed a set share of the limit.
The commitment fee for a period is usually calculated as:
Here the undrawn amount is the facility limit minus what is drawn, the fee rate is the annual rate, and 360 is the day-count basis used for most currencies (365 for sterling). On a 100 million facility with 30 million drawn and a commitment fee of 0.40% a year, the fee for a 90-day quarter is 70 million multiplied by 0.004 multiplied by 90 divided by 360, which equals 70,000.
Covenants and controls
Lenders protect themselves through the loan agreement. Typical terms include:
- Financial covenants. Tests such as maximum net leverage or a minimum interest coverage ratio, checked each quarter. Breaching a financial covenant usually blocks new drawings and can trigger default unless lenders grant a waiver.
- Drawstop conditions. Before each drawing the borrower must confirm that no default is continuing and that key representations remain true.
- Protective clauses. A negative pledge limits security given to other creditors, and a cross-default clause lets lenders act if the borrower defaults on other debt.
- Clean-down provisions. Some working-capital facilities require the balance to be reduced to zero, or below a set level, for a few days each year to prove the borrowing is not permanent.
RCFs compared with other funding
An RCF differs from an overdraft because it is committed for a fixed term, whereas an overdraft is usually repayable on demand. It differs from a term loan because amounts repaid can be redrawn. For banks, undrawn commitments still use capital: under Basel III they are converted into credit exposure using credit conversion factors, which is one reason commitment fees exist. During the COVID-19 shock in March 2020, many companies drew their RCFs in full as a precaution, showing how quickly these facilities can turn into funded loans when markets are stressed.