How An Equipment Line of Credit or Revolver Can Help Your Cash Flow

A revolving credit facility 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.

A revolving credit line is excellent for day-to-day operations, especially if your company's cash flow is unpredictable and you have some unexpected significant expenses. To put it another way, firms with low cash levels must fulfill their net working capital requirements. Therefore, it's commonly thought of as a type of short-term borrowing that's usually repaid quickly.

When a company applies for a revolver, the bank considers several factors to determine the company's creditworthiness. Among these are the income statement, cash flow statement, and balance sheet statement.

Features of a Revolving Credit Facility

Cash Sweep

A cash sweep (or debt sweep) feature is frequently included in the revolver's design. It indicates that the bank will utilize any surplus free cash flow created by a firm to pay down the revolver's existing loan ahead of schedule.

Instead of dispersing the cash to its shareholders or investors, it compels the firm to repay the debt quicker. It also reduces the credit risk and responsibility associated with a firm depleting its cash reserves for other reasons, such as making large, unnecessary expenditures.

Interest Expense

The borrower is only charged interest on the amount withdrawn, not on the entire credit line. The revolver's remaining half is constantly ready to fire. The revolver's significant benefit comes from this characteristic of built-in versatility and ease. When it comes to its outstanding debt, a company can choose to pay the whole amount all at once or make minimal monthly installments.

The interest rate is generally like the company's senior term loan rate. It is, however, subject to change and is based on the bank's prime rate plus a premium, with an additional premium decided depending on the company's creditworthiness.

Maximum Amount

When a company's cash flow is insufficient to satisfy its financial commitments, it might draw a revolver to make up the difference. The bank has established a maximum borrowing amount. The bank may, however, evaluate the revolver on an annual basis. If a company's sales decline dramatically, the bank may reduce the revolver's maximum amount to safeguard it from default.

If a firm has a high credit score, enough cash reserves, a stable and growing bottom line, and makes regular, consistent payments on a revolver, the bank may agree to extend the maximum amount.

Commitment Fee

A bank may impose a commitment fee to start the revolving credit facility. It rewards the lender for maintaining open access to a possible loan, with interest payments starting only when the revolver is drawn. The actual charge might be a predetermined percentage or a flat price. 

Reusability

A revolver loan is so named because once the outstanding balance is paid off, the borrower can utilize it again and again. It's a rotating cycle of withdrawing, spending, and repaying indefinitely until the agreement expires, the revolver's duration ends.

A revolving credit facility is not the same as an installment loan, which has fixed monthly payments over a specified length of time. You can't utilize an installment loan again once it's paid off, much like the revolver. The borrower must apply for a new installment loan.

What Is a Revolver?

A revolver is a borrower, either an individual or a business, who uses a revolving credit line to carry a balance from month to month. Borrowers are needed to make minimum monthly payments, which are applied to interest and principal reduction. Corporations utilize revolvers in finance to cover working capital needs, which include costs for day-to-day operations like payroll.

A revolver can also be referred to as a revolving debt or a revolver loan. On the other hand, Revolver loans are often fixed-rate credit instruments and are sometimes confused with business loans. A revolving credit line usually has a variable interest rate established by the bank, which might change depending on market circumstances.

What Is an Equipment Line of Credit?

A credit line is a predetermined quantity of money that can be borrowed at any moment. When a borrower has an open line of credit, they can take money out as needed until the limit is met, and when the money has been repaid, it can be borrowed again.

A line of credit is an agreement between a financial institution, usually a bank, and a customer that specifies the maximum loan amount the customer can get. If the borrower does not exceed the agreed-upon maximum amount, the cash from the line of credit can be used anytime the borrower wants it.

Equipment Line of Credit refers to a revolving line of credit that converts to a term loan and is made available to Borrowers under the Loan Agreement's terms and conditions.

A credit extension provided to borrowers up to a specific amount is referred to as an equipment line.

Revolver in a Financial Model

Because it highlights changes in a company's debt based on operational assumptions, a revolving credit facility is an essential element of financial modeling. For example, if revenues are expected to drop dramatically in the following years, a firm would seek other funding sources to support research and development or capital expenditures as means to expand the business. It may have to take on more debt to cover these costs.

If the firm does not have enough cash to cover   the debt, it can use a revolver drawdown, as previously indicated. As a result, a change in the revolver is triggered by a change in the debt amount of a firm. A revolver also aids in the balance of a financial model by calculating any extra cash earned or cash deficit for a particular year.

Acquisitions and a Revolving Credit Facility

In the case of acquisitions, a revolving credit line might aid in financing operations working capital. In a nutshell, positive operational working capital means that cash is locked up in operations, and the company needs immediate funding. A negative operating working capital suggests that the company has access to a “free'' short-term finance source.

The balance of operational working capital varies throughout the year if it is seasonal. For example, a toy manufacturer's operating working capital will be abnormally high before the holiday season since much of its cash will be locked up in inventory. If the operational working capital is at its seasonal peak at the time of the purchase, the company seller will seek to be paid for the extra operating working capital.

The additional payment for the substantial operational working capital is, however, only a temporary need. Acquirers may utilize a revolving credit line to finance seasonal operational working capital in these circumstances since it is a low-cost source of short-term financing. As the operational working capital liquidates into cash, they can repay the revolving credit arrangement.

Revolving Credit Vs. Non-Revolving Credit

Revolving credit includes both credit cards and lines of credit. Because you must repay the loan over a certain length of time with regular monthly installments, installment loans are non-revolving. When compared to paying down a non-revolving credit amount, revolving credit offers considerably greater flexibility.

Auto loans, home loans, and student loans are all instances of non-revolving credit. The account is terminated after the non-revolving credit balance is paid in full. If you pay off your entire revolving credit amount, on the other hand, you can utilize it to spend up to your credit limit again.

Non-revolving credit has its own set of advantages. Installment loans often have lower interest rates and are simpler to fit into your budget because they have a set payment schedule.

A Revolving Line of Credit's Eligibility Requirements

To qualify for a revolving line of credit, you must provide financial statements to the lender to demonstrate your company's creditworthiness. Your cash flow statement, bank accounts, balance sheet, and income statement are examples of this.

Both non-revolving and revolving credit may be beneficial financial instruments for any company, so it's worth carefully weighing your alternatives.

Types of Revolving Credit

Secured and unsecured revolving credit are also available. There are significant distinctions between the two. A secured line of credit is backed by a piece of property, such as a house. Unsecured revolving credit is not secured by collateral or an asset, such as a credit card unless it is a secured credit card, in which case the user must deposit cash as collateral.

Its own assets might secure a company's revolving line of credit. The overall credit granted to the customer in this scenario may be limited to a specific percentage of the secured asset. A credit limit of 80 percent of a company's inventory balance, for example, may be set by a financial institution. If the firm fails to repay the loan, the financial institution has the right to foreclose on the secured assets and sell them to satisfy the debt.

Because unsecured credit poses a greater risk to lenders, it is always accompanied by a higher interest rate.

Advantages and Disadvantages of Revolving Credit

The primary benefit of revolving credit is that it allows borrowers to access funds whenever they need them. Many small and big firms rely on revolving loans to keep their cash flow stable during seasonal variations in expenses and revenues.

Rates for business lines of credit vary significantly, just as they do for consumers, based on the company's credit history and whether the line of credit is secured with collateral. Businesses, like individuals, may keep their borrowing rates low by paying down their amounts to zero each month.

If not correctly handled, revolving credit may be a hazardous method to borrow. Your credit usage rate accounts for a significant portion of your credit score. Your credit score may suffer because of a high credit use rate.

Let us help you with your Revolving Credit

We'll help you to figure out exactly how long your loan will last through an amortization schedule. It may be necessary to find additional temporary financing, such as working capital loans or overdraft lines. These may require a lower payment than the minimum revolving line of credit, but the amount will increase as your business needs grow. At some point, you’ll need to replace those short-term financing sources.

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