Revolving Credit Facilities

What is the Revolving Credit Facility?

Revolving Credit Facility is one of the forms of business finance in which flexibility is provided to the companies to borrow and use the funds of the financial institution according to their cash flow needs by paying a commitment fee as agreed in the agreement with the financial institution.

Revolving Credit Facilities are basically pre-approved corporate loan facilities (just like credit cards) wherein corporate can avail a loan without any further documentation and there are no fixed repayments schedules for the same.

Revolving-Credit-Facilities

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Revolving Credit Facilities (wallstreetmojo.com)

How Revolving Credit Facilities Works?

Now, you may wonder what the bank does if the small business owner fails to pay off the amount.

The bank values the inventories or the accounts receivables at 80% and then sell off the inventories or accounts receivables if the business owner fails to pay off the loan amount she has taken.

How to interpret Revolving Credit Facilities?

Many companies in the US use the flexibility of such credit and usually, you will find that they report back on their balance sheet.

Let’s say, a company has taken a revolving credit facility from a bank. Now, where the company would report its revolving credit in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more?

They would first set up their balance sheet. They will go to the section of debt and then usually, they will mention a note below the balance sheet where they will report about what exactly happens in regards to a revolving line of credit.

Now, what if they don’t mention?

Then it would be difficult for an investor to find out where the debt (the figure) has come from. If the company has done the calculation but doesn’t show the calculation and the exact narration of how it happened under the balance sheet, it wouldn’t be possible for the investor to understand it.

The filing system under sec filingsSec FilingsSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more is done to ensure that the investors’ interest is secured. Not showing or mentioning a revolving line of creditLine Of CreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business.read more will be treated as non-disclosure and will not help the investor at all.

In the example below, we will show you how you would be able to do that.

Revolving Credit Facility Example

Balance Sheet of ABC Company

Particulars2016 (In US $)2015 (In US $)
Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more300,000400,000
Investments45,00,00041,00,000
Plant & Machinery13,00,00016,00,000
Intangible AssetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more15,00010,000
Total Assets61,15,00061,10,000
Liabilities  
Current Liabilities  
Short term debt including current maturities50,00080,000
Accounts PayableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more60,00070,000
Deferred RevenueDeferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. read more30,00045,000
Accrued ExpensesAccrued ExpensesAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more60,00075,000
Long term Liabilities  
Long term debt*95,000125,000
Deferred Revenue20,00015,000
Total Liabilities3,15,0004,10,000
Stockholders’ EquityAmountAmount
Preferred Stock550,000550,000
Common Stock50,00,00050,00,000
Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more250,000150,000
Total Stockholders’ Equity58,00,00057,00,000
Total liabilities & Stockholders’ Equity61,15,00061,10,000

This is the balance sheet we have. Now we will see how to represent the revolving credit facility. You can see an asterisk on Long term debtTerm DebtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability.read more.

Let’s look at the note.

Particulars2016 (in US $)2015 (In US $)
Notes due in 2020120,000140,000
Revolving Credit Facility25,00020,000
 145,000160,000
(-) Short-term debt including credit facility(50,000)(80,000)
Long-term debt95,00080,000

In 2015, ABC Company has taken a revolving credit facility of US $50,000 from RVS Commercial Bank. They wanted to expand upon their operations by buying a new machine for their production house. So, in 2015, they took US $20,000 which was payable within 3 months of borrowing. That’s the reason it was treated under short-term debt. In 2016 as well, they took a revolving credit of US $25,000 from the same bank and the payment was due within 90 days of borrowing. So in this case as well, the revolving credit was included in the short-term debt.

In reality, it is much more complex (we will see in the practical examples).

Nestle Example

A consolidated balance sheet as at 31st December 2016 & 2015

Nestle Revolving Credit Facilities

Source – Nestle Annual Report

The above balance sheet is the depiction of the long term and short term debt of Nestle in the years 2015 and 2016.

Let’s have a look at how they report revolving credit facility under “notes” in their annual report. They have mentioned it under Liquidity RiskLiquidity RiskLiquidity risk refers to 'Cash Crunch' for a temporary or short-term period and such situations are generally detrimental to any business or profit-making organization. Consequently, the business house ends up with negative working capital in most of the cases.read more Management.

They have mentioned that they didn’t expect any refinancingRefinancingRefinancing is defined as taking a new debt obligation in exchange for an ongoing debt obligation. In other words, it is merely an act of replacing an ongoing debt obligation with a further debt obligation concerning specific terms and conditions like interest rates tenure.read more issues and they have two revolving credits. In the year 2016, they would have extended both of their revolving credits by one year. Along with that, the key factors of the note are –

  • Firstly, they had mentioned about two new revolving credit (of the US $4.1 billion and of EUR 2.3 billion) with an initial maturity date of October 2017. It had also been mentioned that the group has the ability to convert (if at all) in a one-year term loan.
  • Secondly, they had also mentioned about the existing facilities and their extended maturity date. The new maturity date of these revolving credit facilities (one of US $3.0 billion and another of EUR 1.8 billion) had been mentioned as October 2021.
  • Thirdly, they had also remarked that these facilities should be treated as a backstop to their short-term debt.

WalMart Example

A consolidated balance sheet of Wal-Mart as at 31st January 2017 & 2016

Wallmart Debt

source: WalMart 10K Report

Now, we will see how they have represented the revolving credit facilities. The above balance sheet of Wal-Mart has portrayed the short term borrowings and long-term debts.

In their annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, they had a note in regard to short-term borrowings and long-term debts. Under that note, they have talked about their credit facilities.

First of all, they had mentioned about their short-term borrowings which are depicted in the following representation –

Walmart Revolving credit facilities - maximum amount outstanding

source: WalMart 10K Report

Wal-Mart had been committed with 23 institutions, combining them to the US $15 billion as of 31st January 2017 and 2016. Let’s have a glimpse of that in the table below –

Walmart Revolving credit facilities

source: WalMart 10K Report

They had also mentioned in the note that they had extended both a five-year credit facility and a 364-day revolving credit facility in June 2016.

Revolving Credit Facility vs Credit Cards – Key Differences

It may seem like a credit card for small business owners, but it’s not. There are many differences. Let’s have a look at them one by one –

  • In the case of a credit card, the person needs to carry it. But in the case of revolving credit facilities, the person doesn’t need to carry any card.
  • While using a credit card, the individual needs to make a purchase. But in the case of revolving credit facilities, the person doesn’t need to make any transaction. She can get the money directly into her business account for whatever reason she needs it.
  • The fees charged for a credit card is often much more than the fees charged for the revolving credit facilities.
  • Flexibility in terms of credit is much more in revolving credit facilities than a credit card.

Revolving Credit Video

 

In the final analysis

The revolving credit facility is a boon for many small business owners. Even giant companies are also taking advantage of this thing.

As an investor, if you would like to know where the company has reported its revolving credit facility, look at their annual report and find notes regarding risk management, a credit agreement or short term or long term borrowings.