Revolving Loan Facility
Candlefocus EditorRather than charging a fixed rate for the entire loan amount, revolving loan facilities may charge a variable rate, with the primary rate typically being based on the prime rate. Repayments are also flexible, meaning that the borrower can decide whether to make fixed payments, interest-only payments, or a combination of the two. Any payments over and above the interest-only repayments can be considered additional payments, also referred to as “drawdowns,” which are applied to reducing the loan amount.
Borrowers have the opportunity to re-draw funds up to the pre-specified limit when the principal portion of the loan is paid off or reduced. This revolving nature of a revolving loan facility allows a business or individual to continually access funds on an “as needed” basis, allowing greater financial flexibility and freedom.
Another key benefit of revolving loans is that businesses are not forced to provide security, making the process of obtaining such loan a relatively simple one. However, due to the higher risk that banks undertake when offering such facilities, the interest rates charged by lenders tend to be quite high.
In order for a business to be approved for a revolving loan, lenders require businesses and individuals to provide proof of their financial situation and creditworthiness—showing that they would be able to repay the loan without further finance, should it be required. In addition, lenders may also require a lien to be placed on the borrower’s assets, providing additional security for the loan.
A revolving loan facility is a great option for businesses and individuals who want access to working capital on an ongoing basis, access to short-term funding, and are able to use the facility in a disciplined and controlled manner. Revolving loan facilities can help businesses become financially resilient by allowing them to manage their cash flow needs in a more streamlined and cost-effective way.