A revolver is a loan which can be drawn down and repaid. In a business context, a revolver frequently is secured by the borrower's receivables and/or inventory. This kind of asset-based loan is designed to optimize the availability of working capital from the borrower's current asset base. Here's how it works. The borrower grants a security interest in its receivables and/or inventory to the lender as collateral to secure the loan. This grant of security interest creates the borrowing base for the loan. As receivables are paid, the cash is turned over to the lender to pay down the loan balance. When the borrower needs additional working capital, the borrower requests another advance. The lender manages a revolving credit facility and the related collateral in order to offer the borrower the largest possible loan amount at any given time. Because the borrower's customers are generally not notified of the assignment of the accounts to the lender, the borrower continues to service its receivables. The borrowing arrangement is usually transparent to the borrower's customers.
^ back to topWhat is the cash collection cycle and how does it work?
The cash collection cycle is simply a way of segregating collections as accounts are received. As receivables are paid, the cash collected is used to pay down the outstanding loan balance. This creates a win-win situation: the lender minimizes the outstanding loan risk, and the borrower minimizes idle cash and interest expense while creating renewed borrowing availability. When the borrower requires additional cash for working capital, the lender advances funds based on the updated borrowing base. This cycle can be done as frequently as daily if needed.
^ back to topWhat receivables are eligible as security for a revolving credit facility?
Most receivables from completed transactions are eligible. Some receivables which fall into specific categories, however, are not. Typical examples of ineligible receivables would include receivables 90 or more days past due and any intra-company receivables. Some lenders also have the capability to lend against certain government receivables and foreign source receivables.
^ back to topWhat inventory is eligible as security for a revolving credit facility?
Treatment of inventory varies from company to company and from industry to industry. It would not be unusual for eligible inventory to include all finished goods and marketable raw materials. It would be much less common to include work in process, damaged goods, slow moving inventory, or certain specialized products that can only be sold to a limited number of purchasers.
^ back to topCan I have a revolving credit facility if I don't have receivables?
Yes. It is possible to have a revolving credit facility secured solely by inventory, although advance rates are generally not as high as for facilities secured by receivables. Inventory-only facilities are commonly used in the retail industry, where most cash sales are generated from inventory.
^ back to topCan I have a revolving credit facility secured by inventory in different countries?
It may be possible to use the inventory as collateral to support a U.S.-based revolving credit facility, depending on which country the assets are located in, and provided the assets are owned by a U.S. parent company or a company domiciled in the U.S. In an increasingly global marketplace, a growing number of businesses cross borders to service customers or source inventory. Not all revolving credit lenders can offer cross-border facilities and few can offer a borrower a foreign revolving credit facility. If your needs involve cross-border facilities, ask about a lender's cross-border capabilities before accepting any proposal.
^ back to topIs asset-based lending such as a revolver a common type of financing?
Absolutely. According to the Commercial Finance Association, asset-based lending is over a $200 billion market. The users of asset-based lending span a broad range of industries, with manufacturers representing approximately 31% of the total marketplace, followed by wholesalers (28%), and retailers (17%). By revenues, the large majority of these borrowers (71%) are under $50 million in size.
^ back to topCan an asset-based loan be used to finance an acquisition?
Yes, this is a commonly used means to finance acquisitions. In fact, it is possible to use the assets of the company being acquired to finance the acquisition. This can be especially advantageous when the prospective acquisition has a high level of eligible receivables and/or inventory in relation to the purchase price of the company. Such companies are often excellent prospects for acquisition, and asset-based lending can provide a significant source of the acquisition capital.
^ back to topCan asset-based lending be used as growth financing?
Yes. A revolving credit facility will tend to give a business the greatest amount of flexibility and borrowing capacity from its existing asset base. An innovative asset based lender can design a facility that can grow as the company grows. For example, a revolving credit facility could be designed to provide a higher credit limit as the business increases its borrowing base, provided certain key operating ratios are maintained. As the company's needs and collateral grow, so can its ability to borrow.
^ back to topWhat is the principal advantage of using a revolver secured by receivables and/or inventory?
The principal advantage is the acceleration of cash flow to the borrower to support its working capital needs. By using its current assets as collateral, a company is able to generate cash sooner than if it had to wait for inventory to be sold to become accounts receivable and accounts receivable to be paid in cash. Cash is available as needed, and any cash not needed on a daily basis is used to pay down the loan balance and minimize interest expense. A revolving credit facility is actually a very cost-efficient alternative for a business that needs to liquify its working capital without having to slow growth or add to its equity capital.
^ back to topWhat is the difference between asset-based lending, revolving credit facilities, and commercial finance?
Asset-based lending refers to loans secured by a wide variety of assets. Businesses can borrow money using the liquid, current assets of the company (such as accounts receivable and/or inventory) or the fixed assets of a business (such as plant, property, and equipment) as collateral. Asset-based lenders rely on the value of the underlying collateral to minimize the loan's credit risk. Asset-based loans also can include equipment loans and real estate mortgages. Commercial finance is the term most commonly affiliated with the industry group of lenders that provides all types of asset-based loans to business and commercial borrowers. Asset-based lenders are sometimes referred to as secured lenders.
^ back to topWhy do companies use revolving credit facilities?
Companies generally take the secured revolver alternative when they cannot obtain an unsecured bank loan which, when added to their normal cash flow, would satisfy their working capital needs. In these circumstances, a secured revolver may provide adequate incremental cash acceleration to fund ongoing business operations.
^ back to topHow long does it take to close a revolving credit facility?
Normally you should expect a 4 - 6 week period from the date a proposal is accepted until a new facility is funded. Of course depending on the complexity, type of facility, and amount of negotiation engaged in by the parties, it may take more or less time. Certain types of transactions, such as Debtor-In-Possession transactions, are commonly concluded or committed to within a few days. Closing can take longer if unusual circumstances such as significant inter-creditor negotiations or third party consents are required to complete the transaction.
^ back to topWhat kinds of companies use revolvers?
Many different kinds of companies use revolvers. They are particularly popular among retailers, wholesalers, distributors, and manufacturers because these types of companies (a) can benefit from a cost-effective source of working capital, and (b) have specific types of current assets that can easily be pledged as security.
^ back to topDo publicly traded companies use revolving credit facilities?
Absolutely. Publicly held companies use revolvers for the same reasons any company uses them-to accelerate cash flow. As the capital markets continue to grow and the IPO market continues to operate efficiently, increasing numbers of smaller companies gain access to the public equity markets. Even newly public companies use revolving credit facilities to optimize the use of existing assets to provide working capital. A revolving credit facility often provides a much lower cost source of working capital than raising additional equity.
^ back to topHow does a revolving credit facility differ from a term credit facility?
The outstanding loan amount with a revolver secured by receivables may fluctuate on a daily basis. With a term loan, the outstanding amount is fixed for a period of time, such as a month or a year. A term loan generally provides for an agreed upon payment schedule, and amounts paid on a term loan generally cannot be reborrowed. In contrast, a revolver allows the borrower to borrow, repay, and reborrow as needed over the life of the loan facility. There are advantages to both revolvers and term loans depending on the borrower's needs. The structure of revolvers provides a great deal of flexibility for borrowing and repayment. Most companies secure a revolver with current assets, such as receivables and inventory, and use the borrowed funds to finance working capital needs. In contrast, companies tend to secure term loans with fixed assets, such as property and equipment, and use the borrowed funds to finance longer term needs and additional capital equipment.
^ back to topWhat is a borrowing base?
A borrowing base is comprised of the assets, generally inventory and/or accounts receivable, which are available to use as collateral to secure a revolver. The size of the borrowing base varies with changes in amounts of the borrower's current assets. For example, as the borrower builds or acquires new inventory, or as it generates fresh receivables from new sales, these assets are covered by the security interest and generally would be eligible for inclusion in the borrowing base.
^ back to topWhy does the lender monitor collateral in a revolving credit facility?
Ongoing monitoring of the collateral helps to maintain a business relationship on a basis that benefits both borrower and lender. By keeping track of the type and quality of collateral in the borrowing base, a lender can make available to the borrower the largest possible loan which can be supported by the collateral.
^ back to top