Revolving Credit Facility

Businesses rarely have perfectly matched cash inflows and outflows. A retailer builds inventory before the holidays and collects cash after; a manufacturer pays suppliers before customers pay invoices. The revolver bridges these timing gaps in working capital without forcing the company to hold a large idle cash balance or raise permanent debt it doesn't need. It also serves as committed backup liquidity — a war chest for unexpected needs or to backstop a commercial paper program. Because it's flexible and only charged for what's used, the revolver is the cheapest, most senior tranche to keep on hand. In modeling, the revolver is typically modeled as the 'plug' that funds any cash shortfall and is swept down with excess cash.

A revolver has a stated commitment (e.g., $200m) and a maturity (often 5 years). The borrower pays two charges: (1) interest on the drawn balance at a floating rate, typically SOFR plus a spread (e.g., SOFR + 250bps); and (2) an undrawn commitment fee on the unused portion (e.g., 0.50%), compensating the lenders for keeping capital available. Many revolvers include a borrowing base (limiting draws to a percentage of eligible receivables and inventory in an asset-based loan, or ABL) and financial maintenance covenants such as a maximum leverage or minimum interest coverage ratio. Revolvers are usually senior secured and amortize nothing — the balance fluctuates with usage, and any drawn amount is typically due at maturity.

All three are forms of bank debt, but they behave differently. A term loan is drawn once at close, has a fixed repayment/amortization schedule, and cannot be redrawn once repaid — it's permanent financing. A revolver is reusable: draw, repay, redraw, repeatedly, and pay interest only on the drawn balance. A bridge loan is a one-time, short-term facility tied to a specific transaction and meant to be refinanced quickly. The defining feature of the revolver is reusability and the undrawn fee — you pay to keep the option to borrow open, which neither a term loan nor a fully-funded bridge offers.

In a three-statement model or LBO, the revolver is the financing 'plug.' When the cash flow statement shows the company would otherwise run out of cash, the model automatically draws on the revolver to keep the minimum cash balance positive; when there's excess cash, the model pays the revolver back first (a cash sweep). This makes the model self-balancing and avoids negative cash. The interest expense on the average drawn balance feeds back into the income statement, creating the well-known 'circularity' that requires iterative calculation or a circularity switch. Analysts must remember to also accrue the undrawn commitment fee on the unused portion.