How is the cost of a revolving facility worked

2 min read

Interest on drawnNot the limit

Plus a feeFacility/non-utilisation

Usage-drivenCost follows use

Estimate from patternYour real usage

The two cost components

A revolving credit facility has two cost parts. Interest is charged only on the balance you have actually drawn, for the days you hold it — often on a daily basis, so repaying promptly cuts it immediately. On top there may be a facility fee or non-utilisation fee for keeping the line available. Together these determine the cost.

Why usage is everything

Unlike a term loan, a facility's cost is not fixed at the outset — it depends on how much you draw and for how long. Use it lightly and repay quickly and the interest is small; keep it fully drawn all year and it behaves much like a fully-drawn loan. The facility fee, by contrast, applies regardless of usage. So to estimate the cost you have to estimate your usage pattern.

Estimating your cost

Work from a realistic picture of how you will use the line: the typical drawn balance, how long it stays out, and how many days a month you are in credit. Apply the interest to that, add the standing fee, and you have an estimated cost you can compare to a term loan. If you would keep it fully drawn, a term loan is likely cheaper; if usage is light and variable, the facility wins. See facility vs term loan.

Model your usage on the true cost calculator, and to price a line, explore a revolving facility.

Frequently asked questions

How do I estimate what a revolving facility will cost me?

Estimate your typical drawn balance and how long it stays out, apply the interest rate to that (allowing for daily accrual if it applies), and add any facility or non-utilisation fee. That gives an expected annual cost you can compare to a term loan. The key input is honest usage: a facility you keep fully drawn costs like a loan, while a lightly-used one costs much less.

Do I pay interest on a facility I don't use?

Not on the undrawn part in interest terms — interest is charged only on what you draw. But you may pay a facility fee or non-utilisation fee for keeping the line available, which applies whether or not you draw. So an unused facility is not entirely free: check the standing fee, and weigh it against the value of having the line ready.