A revolving credit facility is a financing arrangement where a lender gives a business access to a set pool of funds that can be drawn down, repaid, and drawn down again. Unlike a standard term loan, which gives you a lump sum and then closes, a revolving facility stays open. Repay what you've borrowed and the credit becomes available again, ready for the next time you need it.
It's one of the most commonly used tools in corporate finance, and it shows up everywhere from large ASX-listed companies managing seasonal cash needs to small businesses bridging gaps between invoices.
How the structure actually works
A lender sets a credit limit at the outset, say $500,000. The borrower can draw any amount up to that limit at any time during the facility's term. Interest applies only to the portion actually drawn, not the full $500,000. Repay $200,000 of a $300,000 drawdown and that $200,000 is immediately available again.
Most facilities charge two types of fees. First, an interest rate on borrowed funds, typically variable and pegged to a benchmark rate such as the bank bill swap rate (BBSW) in Australia. Second, a commitment fee on the undrawn portion, usually a fraction of the interest rate, charged because the lender is holding capacity in reserve whether you use it or not.
Facilities run for a fixed term, often one to three years for smaller businesses and up to five years for larger corporates. At expiry, the borrower either repays the outstanding balance or renegotiates a new facility. There's no amortisation schedule during the term: you're not required to chip away at the principal month by month.
Revolving facility vs term loan: the core difference
A term loan is a one-time disbursement. The lender hands over the money, the repayment schedule starts, and once you've paid it off you need a new loan entirely. A revolving facility is permanent working capital. The distinction matters because a business with lumpy revenue, a retailer stocking up before Christmas or a contractor waiting on a slow-paying client, needs flexibility, not a rigid repayment curve.
This is also why understanding working capital and why it matters is so important before you approach a lender. A revolving facility is a working capital tool, not a vehicle for funding long-term assets like machinery or property. Using it for capital expenditure is one of the most common and costly mistakes businesses make with these arrangements.
Who uses revolving credit facilities?
The short answer: almost every business with fluctuating cash needs. A wholesale food distributor might draw on the facility every Monday to pay suppliers, then repay as retail customers settle their invoices by Friday. A law firm might use it to cover payroll during a slow month and clear the balance when a large settlement arrives.
At the corporate end, revolving credit facilities sit alongside other instruments. A company might pair one with a debenture for long-term capital while using the revolving facility purely for short-term liquidity. The two serve completely different purposes on a balance sheet, and sophisticated treasury teams manage them separately.
Banks are the most common providers in Australia, though non-bank lenders and credit unions also offer them. Larger facilities are often syndicated, meaning a group of lenders each fund a portion of the total limit, spreading the credit risk.
What lenders look at before approving one
Lenders focus on three things: cash flow reliability, the quality of the borrower's debtors, and the existing level of debt on the balance sheet. A business with predictable receivables and low existing leverage gets a facility at better rates and on looser terms than one with erratic revenue and a crowded debt stack.
Facilities almost always include financial covenants. Common ones require the borrower to maintain a minimum interest coverage ratio (earnings before interest and tax divided by interest expense) and a maximum leverage ratio (total debt divided by EBITDA). Breach a covenant and the lender can demand immediate repayment or restructure the terms, often at a cost.
Security is common but not universal. Smaller facilities for established businesses with strong credit history sometimes run unsecured. Larger ones typically require a charge over assets, which might be accounts receivable, inventory, or property depending on what the business owns.
The real cost of a revolving facility
Interest on the drawn portion is the headline cost, but it's not the only one. Establishment fees at the start, annual review fees, and commitment fees on the undrawn portion add up. A $500,000 facility sitting mostly unused still costs money every month.
That's why a revolving credit facility rewards active, disciplined use. A business that draws only what it needs, repays promptly, and keeps the facility lean gets the flexibility without the dead weight. One that draws to the limit and never repays has simply taken an expensive loan with extra paperwork.
Businesses should also be aware that facilities are reviewed annually in most cases. A lender who sees deteriorating financials can reduce the limit or pull the facility at renewal. That's a genuine risk if you've built your cash flow model around the assumption that the facility will always be there at full size.
When a revolving facility makes sense, and when it doesn't
It makes sense when cash flow is genuinely cyclical or unpredictable, when the business has creditworthy debtors to point to, and when management has the discipline to treat it as a bridge rather than a crutch. It doesn't make sense as a substitute for equity when the business is loss-making, as a source of growth capital for long-duration projects, or when the commitment fees on an underused facility outweigh the convenience.
For a startup still finding its revenue model, a revolving facility is usually the wrong instrument. Lenders want to see trading history. A convertible note or equity round is a more realistic path for early-stage businesses.
For a stable, growing business with reliable customers and predictable seasonal swings, a revolving credit facility is one of the most cost-effective pieces of financial infrastructure available. Used well, it smooths cash flow without diluting ownership or creating the rigid repayment pressure of a term loan.