How does a cash flow surplus or shortfall affect the revolver?

How does a cash flow surplus or shortfall affect the revolver?

• A. Surplus used to repay revolver; shortfall draws on RCF.
• B. Surplus increases revolver.
• C. Surplus has no effect.
• D. Shortfall reduces equity.

Answer: (A)

A revolving line of credit is used to fund short-term liquidity gaps. When cash flow is surplus, that excess cash is swept to repay the revolver, reducing the outstanding balance and its utilization. When there’s a cash shortfall, you don’t have enough cash to cover obligations, so you draw on the revolver to bridge the gap, increasing the drawn amount and revolver usage. In short, surplus decreases revolver balance; shortfall increases revolver usage and debt.

A revolving line of credit is used to fund short-term liquidity gaps. When cash flow is surplus, that excess cash is swept to repay the revolver, reducing the outstanding balance and its utilization. When there’s a cash shortfall, you don’t have enough cash to cover obligations, so you draw on the revolver to bridge the gap, increasing the drawn amount and revolver usage. In short, surplus decreases revolver balance; shortfall increases revolver usage and debt.