How to Answer “How does a revolving credit facility work, and why do companies use revolvers?” in Investment Banking Interviews
In revolving credit facility interview prep, this is a core prompt because it tests whether you can explain a common liquidity tool without mixing it up with term debt. In investment banking interviews, you’ll hear it as: “How does a revolving credit facility work, and why do companies use revolvers?”
A strong answer quickly defines what a revolver is, walks through the economics (commitment, utilisation, interest and fees), and ties it to real corporate use cases like working capital swings, backstop liquidity, and acquisition flexibility—while noting where it shows up in models and credit agreements.
What Interviewers Look For in Investment Banking Revolver Questions
Interviewers use this as one of those investment banking technical questions that’s simple on the surface but revealing in execution. They’re assessing whether you can explain credit products in plain language, with enough detail to be credible (fees, covenants, tenor) without drowning in legal terms.
They also want judgement: when a revolver is the right tool (short-term liquidity, uncertain cash needs) versus when a term loan or bond makes more sense (longer-dated funding). In many investment banking revolver questions, candidates lose points by describing a revolver like a one-time loan rather than a reusable commitment.
Finally, they’re checking modelling awareness. A revolver affects cash, interest expense, leverage, and liquidity metrics—and in sponsor / credit work it often acts as a plug to avoid negative cash. Being able to connect “how it works” to “how it impacts the numbers” is what makes the answer analyst-level.
Revolving Credit Facility Explained: A Step-by-Step Answer Framework
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Step 1: Define the product (revolving credit facility explained)
Start with a clean definition: a revolving credit facility (revolver) is a committed line of credit from a bank group that a company can draw, repay, and re-draw up to a maximum commitment during the availability period. Emphasise the contrast with a term loan: the revolver is primarily about access to liquidity, not permanently funded capital.
Add 2–3 core terms to sound precise: there’s typically a stated commitment amount, a maturity/tenor, and a pricing grid (often based on a base rate plus a margin, with margin linked to leverage or ratings). Mention that revolvers can be secured or unsecured and usually sit senior in the capital structure.
Close this step by framing the intuition: the company is paying for the option to borrow when needed, even if it doesn’t draw today.
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Step 2: Walk through the economics (interest, fees, and availability)
Explain the cash costs in a structured way. When the revolver is drawn, the company pays interest on the outstanding balance (floating-rate is common) plus any applicable spread. When it is undrawn, the company usually still pays a commitment fee on the unused portion—this is the price of keeping capacity available.
Clarify mechanics that often come up in investment banking technical questions revolving credit: borrowing base or availability conditions (for asset-based revolvers), periodic reporting, and covenant compliance. Many facilities also include a letter of credit sublimit or swingline feature, which can reduce available capacity.
If you want a quick numeric illustration: “On a $200m revolver with $50m drawn, the company pays interest on $50m and a commitment fee on the unused $150m.” This demonstrates you understand how the bank gets paid even when the line isn’t heavily utilised.
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Step 3: Explain why companies use revolvers (corporate finance interview prep angle)
Answer the “why” with 3–4 practical use cases. First, working capital volatility: companies draw to fund inventory builds or delayed receivables and repay when cash comes in. Second, liquidity backstop: having committed capacity supports going-concern confidence and can be important to suppliers, customers, and rating agencies.
Third, bridge to longer-term financing: a revolver can provide temporary funding while a company raises term debt, refinances, or completes an equity raise. Fourth, acquisitions and unexpected needs: it provides flexibility for small add-ons, restructuring costs, or one-off cash outflows.
Anchor the trade-off: revolvers are flexible but usually not the cheapest long-term capital, and covenants/availability tests can constrain behaviour. That balance is central to how to explain revolving credit facilities in interviews.
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Step 4: Tie it to modelling and credit analysis (analyst-level)
Connect the revolver to what you’d do on the job. In a three-statement model, the revolver often acts as a liquidity plug: if cash would go negative, you draw the revolver; if there’s excess cash above a minimum balance, you repay it. This affects interest expense, ending debt, and leverage ratios.
In credit agreements and lender models, note that availability may be limited by financial covenants (e.g., maximum leverage) or fixed charge coverage tests, and that pricing can step up/down with leverage. From a cash flow perspective, revolver draws are financing inflows and repayments are financing outflows.
Finish with a quick sanity check: a stable business with predictable cash flows typically keeps the revolver largely undrawn (paying commitment fees), whereas a seasonal or volatile business may show recurring draws and repayments across the year.
Analyst Model Answer: Revolving Credit Facility Interview Prep
A revolving credit facility is a committed line of credit that a company can draw, repay, and re-borrow up to an agreed limit over the life of the facility. Unlike a term loan, it’s mainly a liquidity tool—more like corporate “credit capacity” than permanent funding.
Mechanically, the company pays interest on the amount drawn, usually at a floating base rate plus a margin, and it often pays a commitment fee on the undrawn portion for keeping that capacity available. The facility has a maturity date and comes with covenants and reporting requirements, and sometimes includes sublimits like letters of credit that reduce available borrowing.
Companies use revolvers for three main reasons: working capital swings, a backstop for liquidity, and flexibility for short-term or uncertain needs—for example bridging to a bond/term loan refinancing or funding small acquisitions or one-off cash outflows. The trade-off is that while revolvers are flexible, they can come with covenant constraints and they’re generally not intended as the cheapest source of long-term capital.
In modelling, I’d typically treat the revolver as a plug to prevent negative cash: draw when cash would go below a minimum balance and repay when there’s excess cash, which then flows through to interest expense and leverage.
- Lead with the core definition: reusable commitment vs one-time borrowing.
- Separate drawn economics (interest) from undrawn economics (commitment fee).
- Give 3 use cases, not a long list—working capital, backstop liquidity, bridge/flexibility.
- Add one modelling tie-in (revolver as a plug) to sound like an analyst.
Common Errors in Investment Banking Technical Questions on Revolvers
- Describing a revolver like a term loan and forgetting the “re-draw” feature and undrawn commitment fee.
- Only explaining mechanics and skipping why it exists (working capital variability and liquidity backstop are usually the core points).
- Ignoring covenants/availability conditions and implying the company can always draw regardless of performance.
- Using imprecise language on pricing (e.g., calling it “fixed-rate” by default) and not distinguishing drawn interest from undrawn fees.
- Missing the modelling implication: revolvers affect cash, interest expense, and leverage; they’re often used as a plug to avoid negative cash.
Follow-Ups You’ll Hear in Corporate Finance Interview Prep
How is a revolver different from a term loan?
A revolver is a reusable committed line you can draw and repay multiple times; a term loan is funded up front and amortises or is repaid at maturity.
What fees do you pay on a revolver if you don’t draw it?
Typically a commitment fee on the undrawn portion (and sometimes agency/LC fees), which compensates lenders for reserving capacity.
How do revolvers show up in a three-statement model?
They’re commonly used as a plug: draw to avoid negative cash and repay with excess cash, which changes ending debt and interest expense.
Why might a company avoid relying on its revolver for long-term funding?
Because pricing can be higher than long-term debt for persistent balances and covenants/availability tests can restrict access when performance weakens.
How to Practise and Sound Crisp Under Time Pressure
- Build a 60–90 second version first: definition → pricing/fees → 3 reasons companies use it.
- Practise one quick numeric example (commitment, drawn amount, fee on undrawn) to prove you understand the economics.
- Add a single modelling sentence (“revolver as a plug to prevent negative cash”) and stop—don’t turn it into a legal discussion.
- Record yourself answering two variants: “revolving credit facility explained” and “why do companies use revolvers?” so you can handle different phrasing.
- On AceTheRound, drill this as part of an “investment banking technical questions” set and get feedback on structure and concision.
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