How does a revolving business credit facility work and how can your business use it?

A revolving business credit facility (often shortened to “revolving facility” or “revolver”) is a flexible short‑term borrowing tool banks and nonbank lenders offer to businesses to manage working capital, seasonal inventory purchases, or unexpected cash needs. Unlike a term loan that delivers one lump sum repaid on a schedule, a revolver functions more like a business credit card: you borrow up to your limit, repay, and borrow again as needed. Interest accrues on outstanding balances, and many facilities also impose fees on unused commitment amounts.

This article explains how a revolver is structured, typical costs and covenants, when to use one, how to apply, real‑world examples, and practical tips to avoid common pitfalls. It also links to related FinHelp resources on revolving credit and working capital (see links below).

Why use a revolving facility?

  • Smooths cash flow between receivables and payables. Many businesses use a revolver to bridge the timing gap between when they pay suppliers and when customers pay invoices.
  • Handles seasonality. Retailers, wholesalers, and manufacturers tap a revolver for inventory buildup before peak selling periods.
  • Faster access than repeated term loans. Once the facility is in place, draws are faster and require no new underwriting each time (subject to covenants and the facility’s terms).
  • Conservative cost for short duration borrowing. For short-term needs, interest plus a modest unused‑commitment fee often costs less than rolling short-term term loans.

Key components of a revolving credit facility

  • Credit limit: The maximum principal you may borrow (e.g., $100,000). Limits are set based on the borrower’s credit profile, cash flow, collateral, and lender risk policies.
  • Draw mechanics: Advances may be made by wire, check, or automated transfer. Some facilities use a borrowing base (a formula based on accounts receivable and inventory) to determine the usable portion of the limit.
  • Pricing: Lenders typically price revolvers as a variable rate = benchmark (currently SOFR or a bank base rate) + margin (e.g., SOFR + 250 bps). LIBOR has been replaced in many markets by SOFR as the primary benchmark.
  • Fees: Expect an upfront arrangement or commitment fee, and often an ongoing fee on the unused portion of the facility (commitment fee). There may also be facility closing costs, legal fees, and audit fees.
  • Collateral & security: Many revolvers are secured by assets—accounts receivable, inventory, equipment—or by a blanket UCC‑1 security interest. Small unsecured lines exist, typically at higher rates.
  • Covenants: Financial covenants (e.g., minimum current ratio, maximum leverage) and reporting covenants (monthly or quarterly financials) are common. Trigger events can restrict future borrowing or accelerate repayment.
  • Maturity & renewal: Revolving facilities have a stated maturity (often 1–3 years) and may be subject to renewal or replacement at maturity. Some lenders provide an evergreen feature; others require re-underwriting.

Types of revolving facilities

  • Committed revolver: The lender legally promises the committed amount for the term, subject to covenants—this is the most reliable source of standby liquidity.
  • Uncommitted revolver: Lenders are not legally required to advance funds; availability is at the bank’s discretion. Useful for flexible relationships but less dependable in tight credit markets.
  • Overdraft facilities and credit cards: For very small businesses, these are forms of revolving credit but typically have higher rates and different fee structures.

How lenders price and underwrite a revolver

Lenders underwrite based on business cash flow, collateral quality, historical financial statements, tax returns, and management experience. Pricing depends on risk and market rates: expect a spread tied to the borrower’s credit strength. For many commercial revolvers the benchmark is SOFR + margin; some community banks still use prime‑based pricing.

Be aware of market drivers in 2025: benchmark rates fluctuated in prior years and lenders now commonly use SOFR or a bank’s alternative reference rate (ARR). Always confirm the benchmark and fallback language in your credit agreement.

Practical examples

  • Seasonal retailer: Draws $60,000 to buy inventory for holiday sales, repays within 90–120 days after sales. The revolver keeps operations running without a long‑term loan.
  • Manufacturer with supply disruption: Uses the revolver to pay suppliers during a sudden raw‑material price shock, then repays when product ships and customers pay.
  • Growing professional services firm: Maintains a revolver as liquidity insurance for payroll and payroll taxes during uneven billing cycles.

Real‑world client insight (from practice)

In my practice advising small businesses for 15+ years, a common success story is a retail client who used a $100,000 revolver to manage seasonal inventory. By borrowing only when needed and repaying quickly post‑season, they kept interest costs low and avoided multiple term loans. The lender required monthly sales reporting and a borrowing base tied to eligible inventory and receivables—common conditions that, once met, make the facility very convenient.

Costs to expect and tax considerations

  • Interest: Charged only on outstanding balances. Variable rates mean interest expense changes with market rates.
  • Commitment/unused fees: Typically a small percentage on the undrawn portion (e.g., 0.25%–1.00% annually) — negotiable.
  • Upfront and legal fees: Arranging a committed facility usually requires legal documentation and can include due diligence costs.

Tax note: Interest on business credit is generally deductible as a business expense, but deductions may be limited by IRC Section 163(j) (business interest limitation rules). Tax rules are complex and change; consult your tax advisor and the IRS for current guidance (see irs.gov).

Common covenants and why they matter

  • Financial covenants: Minimum liquidity or EBITDA, maximum debt‑to‑equity or leverage ratios.
  • Reporting covenants: Timely submission of financial statements, accounts receivable aging, and compliance certificates.
  • Negative covenants: Restrictions on additional debt, asset sales, or dividends.

Failing covenants can lead to defaults, higher borrowing costs, or facility termination. Negotiate realistic covenant levels and understand cure mechanics or waiver processes.

How to choose and negotiate a facility

  1. Shop pricing and structure: Compare committed versus uncommitted offers, interest spreads, and fee schedules.
  2. Understand collateral requests: Can your business provide eligible receivables or inventory? If not, consider guarantors or unsecured providers.
  3. Ask about borrowing base details: What percentage of receivables and inventory is eligible, and what reserves apply?
  4. Check documentation and legal costs: Ask for a draft credit agreement early to identify problematic terms.
  5. Negotiate renewal and amendment mechanics: You want predictability at maturity.

Application checklist

  • Last 2–3 years of financial statements (audited or compiled),
  • Interim financials and cash‑flow forecasts,
  • Accounts receivable aging and inventory schedules (if borrowing base),
  • Business and personal credit profiles,
  • Documentation of collateral and UCC searches,
  • Ownership and corporate structure documents.

What to avoid: common mistakes

  • Using the revolver for long‑term capital projects. If funding long‑term CapEx, a term loan or equipment financing is usually cheaper and more appropriate.
  • Letting covenants lapse or failing to deliver reports. Stay current to avoid technical defaults.
  • Overreliance without a repayment plan. Revolvers are for short-term liquidity; prolonged balances multiply interest costs.

How a revolver interacts with other financing options

Use a revolver alongside term loans strategically: a term loan can fund long‑term investments while the revolver handles day‑to‑day working capital. For comparisons and decision help see our article on term loans vs revolvers: “Term Loans vs Revolving Credit: Structuring Business Working Capital”.

Helpful FinHelp resources

Authoritative sources and further reading

  • Consumer Financial Protection Bureau — business borrowing basics and borrower rights (consumerfinance.gov).
  • Internal Revenue Service — rules on business interest deductions and reporting (irs.gov).
  • Small Business Administration — financing options, documentation, and lender programs (sba.gov).
  • Federal Reserve and bank lending guidance for current benchmark rate practices; note the market shift toward SOFR.

Frequently asked questions

  • Can a revolver be unsecured? Yes; smaller unsecured lines exist, but they usually carry higher interest and lower limits. Secured revolvers offer larger limits and lower spreads.
  • What happens at maturity? At maturity a committed revolver must be renewed, replaced, or paid down. Failure to renew may require repayment of outstanding balance.
  • Are there penalties for early repayment? Generally no—revolvers allow repayment at any time—but check for prepayment or breakage fees on some negotiated facilities.

Summary: best practices

  • Use a revolver for short‑term working capital and seasonal needs, not for permanent finance.
  • Keep utilization moderate—aim to maintain headroom and avoid covenant breaches.
  • Monitor pricing: understand benchmark language (SOFR vs legacy rates) and how margin changes with covenant tests.
  • Maintain clear reporting and communication with your lender—good relationships reduce friction in tight times.

Professional disclaimer

This content is educational and does not constitute legal, tax, or investment advice. For decisions about a particular facility, consult a licensed attorney, tax advisor, or commercial lender.

Related FinHelp pages

(Authoritative sources: Consumer Financial Protection Bureau — consumerfinance.gov; IRS — irs.gov; Small Business Administration — sba.gov.)