A revolving credit facility is a business borrowing arrangement in which a lender sets a maximum credit limit and the borrower can draw funds, repay them, and draw again as often as needed until the facility matures. Interest accrues only on the amount actually outstanding, and a smaller fee typically applies to the portion left unused. In corporate finance, it functions much like a credit card scaled up for a company: flexible access to capital for cash-flow gaps, seasonal swings, and unexpected needs, without the rigidity of a fixed loan.
How It Works
At the start, the lender and borrower agree on four things: a maximum credit limit, a maturity date, an interest rate formula, and the rules the borrower must follow while the facility is in place. Limits range from a few hundred thousand dollars for smaller businesses to billions for large corporations. Terms usually run three to five years.
Within that window, the borrower draws whatever it needs up to the limit, pays interest only on the outstanding balance, and restores its available headroom whenever it repays. A company with a $10 million facility that has drawn $2 million pays interest on the $2 million and a smaller fee on the $8 million sitting unused. That unused-portion charge is called a commitment fee, and it compensates the lender for holding capital in reserve.
Drawing isn’t quite as casual as swiping a card. The borrower submits a formal request to the lender specifying the amount, the date, and the rate type. Term SOFR draws generally require at least three business days’ notice; base rate draws can sometimes be same-day.1SEC. MICSA RCF – Revolving Credit Agreement (Execution Version): EX-4.2 The lender confirms no covenant is in breach, then wires the funds. Repayment restores the available balance, and the cycle continues until maturity.
What It Costs
The headline interest rate understates the true cost, because pricing has several layers.
- Interest on drawn funds. The rate is variable: a benchmark plus a margin. Nearly all facilities now use the Secured Overnight Financing Rate (SOFR), which sat at roughly 3.71% in early March 2026. Investment-grade borrowers might pay SOFR plus 100 to 160 basis points. Leveraged borrowers pay more, often through a pricing grid that flexes with the company’s debt-to-EBITDA ratio.2Federal Reserve Bank of St. Louis. Secured Overnight Financing Rate (SOFR)
- Commitment fee. Charged on the undrawn balance, typically 0.10% to 0.50% per year. A company that rarely taps the line still pays this fee to keep the access guaranteed.
- Arrangement fee. A one-time upfront charge covering the lender’s underwriting and legal costs.
- Utilization fee. Some facilities add a further charge when the borrower crosses a specified usage threshold, discouraging heavy reliance on the line.
The design point is that the facility is cheap when barely used and progressively more expensive as draws climb. It works best as a safety net and a smoother of cash flow, not as permanent financing.
Committed vs. Uncommitted
This is the single most important structural question to settle before signing. In a committed facility, the lender is contractually obligated to fund any draw request that meets the agreement’s conditions. The borrower pays commitment fees in exchange for that certainty.
An uncommitted facility lets the lender decide, case by case, whether to fund each request.3Legal Information Institute. Uncommitted Credit Facility Fees are lower, but the lender can decline to advance funds at exactly the moment the company needs them. For a business counting on its line as a genuine backstop, an uncommitted facility creates an illusion of liquidity. Most facilities in the middle market and above are committed for this reason.
How It Differs From a Term Loan
A term loan delivers a lump sum upfront, repaid on a fixed schedule. Once principal is repaid, it can’t be reborrowed. A revolving facility allows draws and repayments repeatedly across the life of the agreement. That reusability drives every other distinction between the two.
Companies often use both together. The term loan funds a specific acquisition or capital purchase with predictable amortization. The revolver handles the unpredictable: a supplier demanding early payment, payroll during a slow month, an unexpected repair. Using a term loan for short-term needs means either borrowing more than necessary and paying interest on idle cash, or going back to the bank whenever something comes up.
What Lenders Require
Approval takes more scrutiny than most borrowers expect, and the obligations continue after closing.
Upfront Due Diligence
Lenders typically review at least three years of audited financial statements to assess earnings stability and tax compliance. A credit committee weighs the industry, competitive position, and default probability before signing off. Larger facilities are often syndicated across multiple banks, with one institution acting as administrative agent to coordinate draws, payments, and compliance monitoring.
Financial Covenants
The credit agreement will include covenants the borrower must maintain for the life of the facility. The two most common are a maximum debt-to-EBITDA ratio and a minimum interest coverage ratio. Midsize businesses typically face a debt-to-EBITDA ceiling somewhere between 2.5x and 4.0x, with the specific threshold depending on industry and risk profile. Breach either one and the lender can freeze the line, refuse new draws, or accelerate the outstanding balance.
Ongoing Reporting
Borrowers submit quarterly financial statements and a compliance certificate signed by the CFO or treasurer confirming every covenant is still met. Asset-based facilities may also require monthly borrowing base reports. Missing a reporting deadline is itself a covenant violation, even if the underlying finances are fine. Companies without a strong finance team sometimes trip over the paperwork alone.
Security and UCC-1 Filings
Secured facilities require the borrower to pledge collateral, often inventory, receivables, or equipment. The lender perfects its security interest by filing a UCC-1 financing statement under Article 9 of the Uniform Commercial Code, which puts other creditors on notice that those assets back an existing loan.4Legal Information Institute. UCC – Article 9 – Secured Transactions The filing covers both current and after-acquired property of the types specified in the agreement.5CDFI Fund. UCC-1 Financing Statement Template Not every facility is secured; investment-grade borrowers often negotiate unsecured lines, paying a slightly higher margin in exchange for skipping the collateral step.
What Companies Use It For
The most common use is smoothing working capital cycles. A manufacturer that pays suppliers in 30 days but collects from customers in 60 days has a persistent cash gap. Drawing on the facility fills it without forcing the company to sit on a large idle balance year-round. Seasonal businesses lean harder, drawing during the buildup months and repaying once revenue arrives.
The facility also serves as a liquidity backstop for the unexpected. Equipment breaks, a key customer pays late, or an acquisition appears on short notice. Established access means the company can respond immediately rather than spending weeks negotiating a fresh loan. Some corporations maintain a revolver specifically to back commercial paper programs, where the facility exists mostly to reassure investors that the paper will be repaid even if the rollover market seizes up.
What Happens if You Default
Covenant breaches can escalate quickly, and the consequences reach beyond the facility itself.
The immediate effect of a violation is a drawstop: the lender freezes access. No new borrowings until the breach is cured or waived. If the borrower can’t cure it, the lender can accelerate the outstanding balance, making everything drawn immediately due. For a company already under strain, that demand often makes things worse.
The real danger is the cross-default clause that appears in virtually every corporate credit agreement. A cross-default provision automatically triggers a default under a second agreement when the borrower defaults under the first.6SEC. Loan Agreement – EX-10.1 A breach on the revolver can cascade into defaults on term loans, bond indentures, and other facilities. That domino effect is why treasurers treat even minor covenant slippage with urgency, and why lenders hold significant leverage in waiver negotiations.
Some agreements also include a material adverse change clause, giving the lender the right to declare default if the borrower’s financial condition deteriorates significantly, even without a specific covenant breach. Lenders rarely rely on it alone to accelerate, but its presence adds bargaining weight during a restructuring.
What Happens at Maturity
When the maturity date arrives, the borrower must repay any outstanding drawn balance in full. The revolving feature ends and no further draws are permitted. Most companies begin negotiating a renewal or replacement six to twelve months before maturity. A lender willing to renew will typically require updated due diligence, fresh credit committee approval, and possibly revised covenants or pricing that reflect the borrower’s current position.
If refinancing fails, the outstanding balance becomes a hard obligation due on a specific date with no ability to roll it. That scenario is where companies get into trouble, particularly if credit markets have tightened or the business has weakened since the original deal was signed. Watching the maturity date and starting early is one of the more underrated disciplines in corporate treasury.