What Are Revolving and Non-revolving Credit Lines?
There are two types of credit lines (also known as lines of credit) – revolving or non-revolving. The differences between both lie around what happens after the maturity of the credit line. A revolving credit line will allow the borrower to drawdown immediately subjected to fulfilling certain mutually agreed terms while a non-revolving credit line will terminate the entire facility.
How a Revolving Credit Line May Affect You
Each arrangement brings about its own advantages and disadvantages. Usually, a borrower with strong financials and an existing relationship with the lender is more likely to obtain a revolving credit line. Revolving credit lines provides convenience to the borrower. This may come at an extra cost to the borrower in the form of a facility fee (think retainer).
Revolving credit lines are suitable for borrowers that operate in sectors that work on projects with long cycles. Therefore, they are more suitable for borrowers that have business deals with consistent terms. Let’s take a company that supplies basic medical supplies to a hospital as an example. An ideal and common scenario would be a blanket commitment for the bulk of these medical supplies, to be delivered in smaller batches over a period. Due to cash flow predictability, lenders are more inclined to offer a revolving credit line to the borrower to finance their contract requirements. The borrower benefits from the assurance that a facility is readily available. The speed of drawing down from a revolving credit line is faster too.
How a Non-revolving Credit Line May Affect You
For borrowers that operate with bespoke terms in every business dealing, a revolving credit line would not work. Having a revolving credit line may create inflexibility and incur additional costs to these borrowers’ operations. An example would be a company that supplies building materials to a construction project. The delivery and credit terms will vary at each stage of the project schedule. As these terms differ, having a revolving facility that has pre-determined drawdown conditions may hinder the borrower’s operational performance. This may potentially create a negative cash flow cycle due to a mismatch in credit terms and repayment schedules.
A revolving facility would sometimes, require the borrower to put up asset(s) as collateral or security. This is a result of the long tenure of the facility. This means the borrower’s asset(s) is going to be tied up for a long period of time. Imagine having to do this for a revolving facility if you do not utilize it frequently.
Conclusion
In conclusion, every borrower must evaluate their requirements and consider all options before coming to a decision. Often what may seem to be very attractive and helpful could be causing inefficiencies , leading to additional cost which could add up in the long run.
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