Asset Based Revolving Credit Facilities, also called "revolvers", accelerate cash flow by monetizing a balance sheet asset. Revolvers are typically secured by accounts receivables and/or inventory. 

Term Loans provide debt financing for a specific period of time, typically between 3 and 7 years. Term loans are typically secured either by real estate and other fixed assets or are provided based upon the borrower's cash flow generation capability. 


What is a revolving credit facility (revolver) and how does it work? 

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. 

What is the 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. 

Why 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. 

Who uses revolvers? 

Many different kinds of companies use revolvers. They are particularly popular among retailers, wholesalers, distributors, and manufacturers because these types of companies:

How 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.

Why 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. 

What 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. 

What 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. 

 Can asset-based lending be used as growth financing? 

Absolutely. 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. borrower retains ownership and complete control of the receivables and inventory and the value of these assets remains on the borrower's financial statement. 


What 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. 

How 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.