RESOURCES

Revolving Line of Credit

One component of senior debt is almost always a revolving line of credit (RLOC). Banks and finance companies are the primary providers of RLOCs. The two most common types of RLOCs are:

• Accounts Receivable Financing
• Inventory Financing

A RLOC facility is provided to a company based on a certain percentage of the appraised orderly liquidation value of the eligible account receivables and inventory. Typically, a company can borrow between 65 percent and 85 percent of the value of its eligible account receivables and 30 percent to 55 percent of the value of its eligible inventory. These advance rates vary depending on the type, quality and historical performance of the company's current assets.

A lender will typically develop a borrowing base formula to determine how much it can lend to a particular business. The formula will generally be reduced by certain nonqualifying assets, such as receivables that are past due and inventory that has aged beyond a certain specified period of time. The lender also takes into account the predictability of a borrower's cash flow that is used to service senior debt. Thus, the effective advance rates for an RLOC business loan is almost always lower than the reported advance rates.

A RLOC is generally the cheapest type of business loan available to a company because the assets collateralizing it are liquid. Interest rates can range from just under prime to three over prime. RLOCs generally have a term of one to three years with renewal provisions, but it is common for them to have no set schedule for principal repayment.