Revolver's Flaws: Why It's Not Ideal For Long-Term Investment

A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. However, it is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again.

Revolvers are primarily used for short-term working capital

The revolver is a way to handle a situation in which deficits are projected, while surpluses simply increase the cash balance. A related issue that emerges in forecasting is that model plugs can create potentially problematic circularities in Excel.

The amount companies can borrow from the revolver is commonly constrained by a “borrowing base”. The borrowing base represents the amount of liquid assets securing the revolver, which are usually accounts receivable and inventory. Formulas can vary, but a typical formula is: 80% of “liquidation value” of inventory + 90% of accounts receivable.

If your model’s revolver balance is growing, perhaps you’re forecasting poor performance, too much spending on capital expenditures, dividends, high paydown of long-term debt, etc.

Practical limitations on how much a company can draw

A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again.

The revolver is a way to handle a situation in which deficits are projected, while surpluses simply increase the cash balance. There’s also a practical limitation on how much a company can draw on its revolver. Specifically, the amount companies can borrow from the revolver is commonly constrained by a “borrowing base.” The borrowing base represents the amount of liquid assets securing the revolver, which are usually accounts receivable and inventory. Formulas can vary, but a typical formula is: 80% of “liquidation value” of inventory + 90% of accounts receivable.

If your model’s revolver balance is growing, perhaps you’re forecasting poor performance, too much spending on capital expenditures, dividends, high paydown of long-term debt, etc. To reflect this concept, it’s preferable to reflect the additional required borrowings in long-term debt.

Most systems do not directly support Global Loans so a typical solution is to set up the facility as two separate security lines and transfer the book cost from revolver to Term Loan as it is drawn down.

Borrowing base represents liquid assets securing the revolver

The borrowing base represents the amount of liquid assets securing the revolver, which are usually accounts receivable and inventory. Formulas can vary, but a typical formula is: 80% of “liquidation value” of inventory + 90% of accounts receivable.

The borrowing base is commonly constrained by a borrowing base. This means that the amount companies can borrow from the revolver is limited.

The revolver is a way to handle a situation in which deficits are projected, while surpluses simply increase the cash balance. A related issue that emerges in forecasting is that model plugs can create potentially problematic circularities in Excel.

The revolver is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations.

The revolver is primarily used to fund short-term working capital shortfalls, rather than long-term cash losses.

Model plugs can create circularities in Excel

A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again.

When a fund ‘goes long' on a revolver it is selling the ‘right to borrow’ to a counterparty. This paper outlines the concept within the framework of traditional bonds and how you would treat the facility and ensuing term loan using standard accounting functionality for bonds. It addresses the fundamental challenge with Global Loan Revolvers. Most systems do not directly support Global Loans so a typical solution is to set up the facility as two separate security lines and transfer the book cost from revolver to Term Loan as it is drawn down.

A revolving loan is primarily used to fund short-term working capital shortfalls, rather than long-term cash losses. There’s also a practical limitation on how much a company can draw on its revolver. Specifically, the amount companies can borrow from the revolver is commonly constrained by a “borrowing base.” The borrowing base represents the amount of liquid assets securing the revolver, which are usually accounts receivable and inventory. Formulas can vary, but a typical formula is: 80% of “liquidation value” of inventory + 90% of accounts receivable.

If your model’s revolver balance is growing, perhaps you’re forecasting poor performance, too much spending on capital expenditures, dividends, high paydown of long-term debt, etc. To reflect this concept, it’s preferable to reflect the additional required borrowings in long-term debt. The revolver is a way to handle a situation in which deficits are projected, while surpluses simply increase the cash balance. A related issue that emerges in forecasting is that model plugs can create potentially problematic circularities in Excel.

For further learning on the mechanisms and how to handle the circularity created by the revolver, go to the “Circularity” section of this article on financial modeling best practices.

Revolvers are not considered a term loan

A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again.

When a fund 'goes long' on a revolver, it is selling the 'right to borrow' to a counterparty. This paper outlines the concept within the framework of traditional bonds and how you would treat the facility and ensuing term loan using standard accounting functionality for bonds. It addresses the fundamental challenge with Global Loan Revolvers. Most systems do not directly support Global Loans so a typical solution is to set up the facility as two separate security lines and transfer the book cost from revolver to Term Loan as it is drawn down.

The revolver is a way to handle a situation in which deficits are projected, while surpluses simply increase the cash balance. A related issue that emerges in forecasting is that model plugs can create potentially problematic circularities in Excel. For further learning on the mechanisms and how to handle the circularity created by the revolver, go to the “Circularity” section of this article on financial modeling best practices.

A revolving loan facility is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again.

The revolver is a way to handle a situation in which deficits are projected, while surpluses simply increase the cash balance. A related issue that emerges in forecasting is that model plugs can create potentially problematic circularities in Excel. For further learning on the mechanisms and how to handle the circularity created by the revolver, go to the “Circularity” section of this article on financial modeling best practices.

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