Revolver Explained

The revolving loan facility (revolver) is a versatile credit tool that acts like a financial safety net for businesses.

Whether managing seasonal cash flow gaps or funding growth initiatives, revolvers are a cornerstone of leveraged buyouts (LBOs), project finance, and everyday corporate liquidity management.

Let’s dive into how revolvers work, why they matter, and how to model them effectively.

What is a Revolver?

A revolver is a flexible loan facility that allows businesses to borrow, repay, and re-borrow funds up to a pre-approved credit limit.

Think of it as a corporate credit card: you only pay interest on what you use, and repaid amounts become available again for future needs.

The revolver is often used to help manage cash flow fluctuations and is repaid as cash becomes available, with interest charged only on the amount drawn.

Key Features:

• Credit Limit: Maximum borrowing capacity, often tied to a “borrowing base” (e.g., accounts receivable or inventory value).
• Variable Interest Rates: Typically pegged to benchmarks like LIBOR + a spread.
• Fees:
  • Commitment Fees: Charged on undrawn amounts (e.g., 0.5% annually).
  • Upfront Fees: One-time charges to establish the facility.
• Flexibility: No fixed repayment schedule—borrowers access funds as needed.

How Does a Revolver Work?

1. Establish the Credit Limit: A lender approves a maximum borrowing amount (e.g., $50M).
2. Draw Funds: The borrower taps the revolver to cover cash shortfalls (e.g., $10M for inventory purchases).
3. Pay Interest: Interest accrues only on the drawn amount.
4. Repay & Reuse: Repayments replenish the available credit, allowing reuse during the facility’s term (often 3–5 years).

Example:
A retailer with a $20M revolver draws $5M to stock up for holiday sales. After the season, it repays $5M, restoring the full $20M credit line for future needs.

Why Use a Revolver?

1. Cash Flow Smoothing: Perfect for businesses with cyclical or unpredictable revenue (e.g., retail).
2. Cost Efficiency: No interest on undrawn amounts—cheaper than term loans for short-term needs.
3. Emergency Liquidity: Acts as a buffer for unexpected expenses (e.g., equipment repairs, supply chain disruptions).

Key Considerations

1. Borrowing Base: Lenders may restrict credit limits based on collateral (e.g., 80% of accounts receivable).
2. Covenants: Financial ratios (e.g., Debt/EBITDA ≤ 4x) or restrictions on dividends.
3. Annual Reviews: Lenders reassess creditworthiness and adjust terms periodically.

Revolvers in Financial Modeling

In LBOs or project finance models, revolvers act as a plug to balance cash shortfalls or surpluses:

1. Cash Shortfalls: Draw from the revolver to cover deficits.
2. Cash Surpluses: Repay revolver balances first (often before triggering cash sweeps on term loans).

Modeling Steps:

1. Link to Cash Flow:
   • Deficit: Increase revolver draws.
   • Surplus: Repay outstanding revolver balances.
2. Interest Calculation: Apply variable rates only to drawn amounts.
3. Fees: Include commitment fees on undrawn portions.

Example:

• Credit Limit: $50M
• Starting Balance: $0
• Year 1 Cash Deficit: 10M→ Draw $10M from revolver.
• Year 2 Cash Surplus: 15M → Repay $10M revolver, leaving $5M for term loan prepayment (cash sweep).

Real-World Applications

1. Leveraged Buyouts: PE firms use revolvers to fund working capital needs.
2. Working Capital: Manufacturers use revolvers to finance inventory and payroll during off-seasons.
3. Growth Financing: Tech startups draw on revolvers to scale operations before securing equity funding.

Revolver vs. Term Loan: Key Differences

Pro Tips for Using Revolvers

• Monitor Covenants: Breaching covenants can trigger defaults or facility termination.
• Optimize Draw Timing: Borrow strategically to minimize interest costs.
• Model Commitment Fees: Even if undrawn, these fees impact net cash flow.

Conclusion

Revolvers are the Swiss Army knife of corporate finance—versatile, adaptable, and critical for managing liquidity.

By incorporating revolvers into financial models, analysts can simulate realistic cash flow scenarios, stress-test liquidity buffers, and optimize debt structures.

Whether you’re modeling an LBO or advising a seasonal business, understanding revolvers ensures you’re prepared for the ebb and flow of real-world finance.