Glossary · UK
What is Revolving Credit Facility?
A pre-agreed business borrowing limit that can be drawn down, repaid and redrawn repeatedly, similar to a business overdraft but more formal.
Full Definition
A revolving credit facility (RCF) is a pre-agreed borrowing limit that a business can draw on, repay and then draw on again as needed, up to the agreed ceiling, for as long as the facility remains in place -- functionally similar to a business overdraft or a credit card, but typically arranged as a formal, larger-scale facility with its own agreement, covenants and fees, rather than an add-on to a current account. Interest is usually charged only on the amount actually drawn at any given time, alongside a commitment fee charged on the undrawn portion of the facility to compensate the lender for keeping the funding available, and facilities commonly run for a fixed term (such as one to three years) before needing to be renewed or renegotiated. Businesses use RCFs to smooth out short-term cash flow fluctuations -- for example, funding stock purchases ahead of a busy season, or bridging the gap between paying suppliers and collecting from customers -- rather than to fund long-term investment, which is more usually financed with a term loan. Like other business lending, an RCF often comes with financial covenants that the business must keep meeting, and lenders can reduce, suspend or cancel the undrawn facility if the borrower's financial position deteriorates, so businesses relying on an RCF for working capital need to keep an eye on their covenant headroom rather than assuming the full facility limit will always be available.