What is the principal advantage of using a revolver secured by receivables and/or inventory?
Answer – A revolving credit facility, also known as a “revolver,” is designed to optimize the availability of working capital from the borrower’s current asset base. As the borrower repays a portion of the loan, an amount equal to the repayment can be borrowed again under the terms of the agreement. Eligible assets commonly included in calculating the current asset base are accounts receivable and inventory. The term “revolver” is used because the amount the asset-based lender is willing to lend increases if the amount of the assets securing the loan increases. Funds are loaned to a company based on a certain percentage of the value of eligible accounts receivable and inventory. A revolving line of credit typically has a term of one to five years with renewal provisions. The advantage of a revolving credit facility is that the company can use current assets as collateral to secure a loan rather than wait until the collateral has been converted to cash.
