A non-revolving bank facility is a type of loan provided by a bank where the borrower receives a fixed amount of money upfront and must repay it over a specified period. Unlike revolving credit facilities, which allow borrowers to withdraw, repay, and re-borrow funds up to a certain limit, non-revolving bank facilities do not replenish once the funds are repaid. This guide will explain what non-revolving bank facilities are, their features, benefits, and provide examples to help learners understand this financial tool.
What is a Non-Revolving Bank Facility?
A non-revolving bank facility is a loan agreement between a bank and a borrower in which the bank provides a lump sum amount that the borrower must repay according to a pre-determined schedule. Once the loan is repaid, the borrower cannot draw additional funds from the facility. This type of financing is typically used for specific projects, capital expenditures, or other significant one-time expenses.
Key Features of Non-Revolving Bank Facilities
- Fixed Loan Amount: The borrower receives a specific amount of money upfront. This amount is determined based on the borrower’s needs and the bank’s lending criteria.
- Repayment Schedule: The loan must be repaid over a fixed period, usually with regular installment payments. The repayment schedule can be monthly, quarterly, or annually, depending on the loan agreement.
- Interest Rate: Non-revolving bank facilities typically have a fixed or variable interest rate. The interest rate is agreed upon at the time of the loan issuance and remains constant (if fixed) or changes according to market conditions (if variable).
- No Re-borrowing: Once the borrower repays the loan, they cannot withdraw additional funds from the facility. To access more funds, the borrower must apply for a new loan.
- Purpose-Specific: These loans are often tied to a specific purpose, such as purchasing equipment, funding a construction project, or making a significant capital investment.
Benefits of Non-Revolving Bank Facilities
- Predictability: The fixed repayment schedule and loan amount provide predictability, allowing borrowers to plan their finances more effectively.
- Lower Risk of Over-borrowing: Since the borrower cannot re-borrow funds once they are repaid, there is a lower risk of accumulating excessive debt.
- Structured Financing: Non-revolving bank facilities offer structured financing tailored to specific projects or expenses, ensuring that funds are used for their intended purpose.
- Potentially Lower Interest Rates: These loans often have competitive interest rates, especially if they are secured by collateral.
Examples of Non-Revolving Bank Facilities
Example 1: A manufacturing company needs to purchase new machinery to increase production capacity. The company applies for a non-revolving bank facility and receives a loan of $500,000. The loan agreement specifies a repayment period of five years with monthly installments. The company uses the loan to buy the machinery and repays the loan over the next five years. Once the loan is fully repaid, the company cannot access additional funds from this facility.
Example 2: A small business owner plans to renovate a storefront. They secure a non-revolving bank facility for $100,000 with a three-year repayment term. The loan is disbursed in a lump sum, and the business owner uses the funds to complete the renovations. The loan is repaid through monthly payments, and once the debt is cleared, the facility is closed.
Differences Between Non-Revolving and Revolving Bank Facilities
- Revolving Bank Facility: Allows borrowers to withdraw, repay, and re-borrow funds up to a specified credit limit. Examples include credit cards and lines of credit.
- Non-Revolving Bank Facility: Provides a one-time lump sum that must be repaid according to a fixed schedule. Borrowers cannot access additional funds once the loan is repaid.
Conclusion
A non-revolving bank facility is a useful financial tool for businesses and individuals needing a specific amount of money for a particular purpose. With a fixed loan amount, repayment schedule, and interest rate, it offers predictability and helps manage debt effectively. By understanding the features, benefits, and differences from revolving credit facilities, borrowers can make informed decisions about their financing needs. Whether for purchasing equipment, funding projects, or making significant investments, non-revolving bank facilities provide structured and reliable funding solutions.