Definition
A non-revolving bank facility is a type of loan extended by a bank to a company where the borrower is afforded a fixed period, often spanning several years, to access the borrowed funds through multiple drawdowns. These funds, once withdrawn, are treated akin to a term loan with specified repayment terms. Unlike a revolving credit facility, which allows for the re-borrowing of funds as they are repaid, a non-revolving facility does not permit repayment and re-borrowal during its term.
Key Features
Structure
This facility provides considerable flexibility concerning the amount and timing of each drawdown, aligned with the borrower’s needs and predefined agreement terms. After funds are drawn down, they generally cannot be redeposited to draw again.
Repayment
Each drawdown typically converts into a term loan, with its own cycle of interest accumulation and set repayment schedule, depending on the terms negotiated.
Comparison with Revolving Bank Facilities
A revolving bank facility acts like a credit card for businesses, where the credit can be reused as it is paid back, offering ongoing liquidity. In contrast, a non-revolving bank facility is more like a traditional loan: once you use the funds, that specific credit is closed for further withdrawals.
Uses in Business
Businesses frequently utilize non-revolving bank facilities for specific projects with identifiable costs up front, such as capital expenditures or expansions that require significant outlays of cash, knowing there will be no need for additional funds later.
Advantages and Disadvantages
Advantages
- Fixed interest rates can make budgeting easier and protect against rate fluctuations.
- Helps maintain discipline in financial management with set limits and purposes for the funds.
Disadvantages
- Less flexibility compared to revolving credit if additional funding is needed unexpectedly.
- Potential for underutilization of the facility if the initial project cost estimates are overvalued.
Witty Insights
Think of a non-revolving bank facility as ordering a bespoke suit—it’s tailored to your exact specifications (funding needs), but once it’s done, any adjustments (further funding needs) might require ordering a whole new suit!
Related Terms
- Term Loan: A loan issued for a specific amount with a set repayment schedule.
- Drawdown: The act of withdrawing funds from an available credit line.
- Revolving Bank Facility: A flexible loan option where the funds can be borrowed again after they’ve been repaid.
Recommended Readings
- “Corporate Finance” by Stephen A. Ross
- “The Handbook of Loan Syndications and Trading” by Allison Taylor, Alicia Sansone
Understanding non-revolving bank facilities is crucial in deciding which funding structures best suit your business needs, especially when precise, large-scale expenses are forecasted.
