Revolving Fund Meaning
A revolving fund is a fund established for the specific purpose used to give loans to members or to be expended or invested for a specific purpose with the condition that repayments or benefits or income from the fund may be used again for these purposes only. It is often used in developing countries to provide credit i.e., money for willing borrowers for their business or other uses and this concept is often used in case of the non-profit making organizations.
- The revolving fund established for the purpose of carrying specific activities and the basic advantage of this fund is it may be loaned or spent repeatedly. The basic idea behind that fund is a fund or money backup that remains available to finance organizations continuing activities. It circulates between the fund and the members.
- The initial contribution of this fund comes from its members i.e., through initial fund investment in case of Non-Governmental organizations and in case of Governmental organizations it comes from National (Central or State) Government and in case of Nonprofit making organizations, it came from donors.
How Does the Revolving Fund Work?
- The initial loan of revolving funds came from its members or donors or Government or a third party and then this fund is collectively either given to one of its member who needs money where fund establishment authority in return charges interest which may be nominal rate or lower than the market rate or the fund can be invested in some specific activities or it may be expended for a specific purpose which gives benefit in long run. Those who had provided initial fund investment are also given interest on the money invested.
- Interest may be a nominal rate or lower than the market rate. And at the year-end or after a specific time period the fund is returned by a borrower to lender i.e. fund establishment authority and again the fund is given to another willing borrower or invested or expended. In this way rotation of fund takes place and fund establishment authority earns the income from a fund which is the difference between interest charged from borrower and interest given to members i.e. investors and that income is used for the welfare of members.
- It is necessary for fund establishment authority to acquire legal status for clear terms and conditions between fund establishment authority and its members. Also, legal status increases the faith of investors that their money is in safe hands and cannot be misused. After establishing legal status, it is necessary to comply with statutory and other legal requirements relating to the fund.
- In non-profit making organizations sometimes donor gives the money to managing authority of Non-profit making organization and directs the authority that it should be used for the specific purpose like renovation of building etc. only and till that purpose is initiated the fund is invested by managing authority and income will be credited to fund only and then it is to be expended for the purpose it was given.
Management and Administration
- As discussed above, legal recognition of funds increases the faith of investors hence it becomes necessary to legally recognize the fund and comply with all the norms relating to funding for maintaining legal status. But sometimes some fund establishing authorities do not legalize the fund and that type of fund is called an informal revolving fund.
- It is managed by managing authorities called a management team decided by members of the fund is legally recognized fund it is necessary to submit all the reports to the registered authority. Audit of the fund becomes necessary and submission of an audit report and other reports like contributories list, amount of contribution, receipts and payment statement, etc. are to be submitted to the registered authority of the fund. Annual accounts and annual reports of the fund also to be sent to members of the fund.
- In the case of the informal revolving fund, it is not required to submit a report as it is not registered. But it is recommended that an audit should be done and report to be sent to the members. However, chances of bankruptcy by the borrower are high hence no guarantee of money.
- A revolving fund is established by its members who are users of funds for some specific purpose. Then members decide regarding the managing authority of the same along with deciding whether to legally recognize the fund or not.
- After that, from members, initial fund investment is collected and then the fund is given to the member who needs and willing to borrow at agreed terms, and at the year-end the interest is given to investors and audited annual accounts also to be sent to investors.
- In the case of the legal revolving fund, all statutory requirements are to be complied with and all documentation relating to funding is to be submitted to registering authority.
The operations of the revolving fund are to be monitored periodically. Normally it becomes self-sufficient after a specific period but factors that are responsible for its failure are inflation, imbalance in interest income and expenditure, liabilities, heavy legal expenses, etc. The proper management of the fund and fast recovery of the cost generates a sense of ownership and financial viability and increase the sustainability and faith
The revolving fund is important for its borrowers as they get easy and convenient finance. Similarly, it is important for the users as they get the return on investment and borrowing option in case of need and that too at affordable rates. In the case of non-profit making organizations, it is most important as they get the return on funds provided by the borrower and that is also used for that specific purpose. And if managed properly revolving funds build self-sufficiency.
The revolving fund is established by its investors for some specific purpose. The initial fund investment is collected from members and members will decide the managing authority and managing authority will decide whether to lend fund or invest the fund or expend the fund for some specific purpose and they also decide that whether a fund is to be legally recognized or not that too with consent of members. The sustainability of funds depends upon members and management. If properly managed, the fund becomes self-sufficient after a specific period of time.
This has been a guide to revolving fund and its meaning. Here we discuss the structure, sustainability, and how does revolving fund work along with its importance. You may learn more about financing from the following articles –