What it means
It helps to think of a revolver as a large, carefully negotiated overdraft for a business. The lender commits a maximum amount for a set period, commonly three to five years, and within that period the borrower decides how much of it to use and when.
Most businesses have lumpy cash flow, and a revolver covers the gaps between paying suppliers, running payroll and collecting from customers without raising equity or renegotiating a loan each time. It is the standard instrument for funding working capital, seasonal peaks and the occasional unexpected bill.
A revolver carries two prices. Interest applies to drawn balances, usually at a floating rate set as a margin over a reference rate, and a commitment fee of roughly 0.25% to 0.75% a year applies to the undrawn portion.
Undrawn capacity is therefore not free, but it is much cheaper than borrowing money you do not currently need. Not all of the commitment is always available to draw.
Availability is the commitment less amounts already drawn and less any letters of credit issued under the facility, and asset-based deals restrict it further with a borrowing base tied to eligible receivables and inventory. Many agreements also require the balance to be cleaned down to zero for a short period each year to prove the facility is funding working capital rather than a permanent hole.
Investors and lenders watch revolver usage as a liquidity signal. A company that has quietly drawn its entire facility has spent its safety margin, which is why undrawn revolver capacity is reported alongside cash in most liquidity disclosures and covenant packs.
In practice
Real-world examples.
Example
A garden equipment retailer draws $3,000,000 in February to build stock for spring, then repays it in full by September once the season's sales have been collected. It pays interest for seven months instead of carrying a term loan all year.
Example
A staffing agency pays contractors weekly but invoices clients on 60-day terms. A $5,000,000 revolver bridges the permanent timing gap, and the balance rises and falls each week as payroll goes out and client payments come in.
Example
A manufacturer has a $20,000,000 commitment with $8,000,000 drawn and $2,000,000 of letters of credit issued to overseas suppliers, leaving availability of $20,000,000 - $8,000,000 - $2,000,000 = $10,000,000. Its treasurer reports that $10,000,000 as part of total liquidity in the monthly board pack.
Formula
Calculation
Availability = Total Commitment - Amount Drawn - Letters of Credit Outstanding. Annual Cost = (Amount Drawn x Interest Rate) + (Undrawn Amount x Commitment Fee).
A distributor has a $10,000,000 revolver, has drawn $4,000,000 and has no letters of credit outstanding, so availability is $10,000,000 - $4,000,000 = $6,000,000. Interest on the drawn balance at 8% is $4,000,000 x 0.08 = $320,000 a year. The commitment fee of 0.50% on the undrawn $6,000,000 is $6,000,000 x 0.005 = $30,000. Total annual cost is $320,000 + $30,000 = $350,000. Measured against the money actually used, that is $350,000 / $4,000,000 = 8.75%, which is the number the finance director should compare with alternative funding rather than the 8% headline rate.Case study
Seen in the real world.
Ferrow Tools is an illustrative, fictional hand tool manufacturer with strongly seasonal sales. Its previous funding was a five-year term loan of $6,000,000, drawn in full on day one, which meant it paid interest on the entire balance for twelve months a year while genuinely needing the money for about five.
The finance director replaced it with a $6,000,000 revolver. Drawings peaked at $4,500,000 during the third quarter build-up and fell to zero in January, and the average drawn balance across the year was $2,000,000. Interest at 9% on that average cost $2,000,000 x 0.09 = $180,000, and the 0.40% commitment fee on the average undrawn $4,000,000 added $4,000,000 x 0.004 = $16,000, for a total of $196,000.
The old term loan had cost roughly $540,000 a year in interest on the full $6,000,000 at the same rate. The fictional saving of around $344,000 came from nothing more than matching the shape of the borrowing to the shape of the cash need, which is the entire argument for a revolver.
Watch out
Common mistakes.
- Assuming undrawn capacity is free, and being surprised by a commitment fee that can run to tens of thousands of dollars a year on a large facility.
- Using a revolver to fund long-lived assets such as machinery or acquisitions, which leaves the balance permanently drawn and blocks the annual clean-down.
- Treating the headline commitment as available cash, when letters of credit and a borrowing base test can cut real availability substantially.
Questions
People also ask.
Is a revolver the same as an overdraft?
The mechanics are similar, but a committed revolver is documented and cannot be withdrawn at will, whereas a typical overdraft is repayable on demand.
Can the lender refuse a drawing?
Yes, if a condition precedent is unmet or a covenant has been breached, which is why covenant headroom matters most when cash is tight.
Does an undrawn revolver count as liquidity?
Usually yes for a committed facility with covenant headroom, and it is normally disclosed alongside cash for exactly that reason.
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