What is a Revolving Credit Investment and what do you need to know as an investor?
Revolving Credit Facility is a financing product that allows SMEs to draw down multiple times, up to a pre-approved credit limit. They may repay the debt anytime and draw down again, as long as their total outstanding is below the overall RCF limit. Each draw down is crowdfunded and an opportunity for investment in the form of a 'note'.
The RCF tenor can be up to 12 months. The tenor of each note drawn from the SME is capped at the initial RCF expiry date. The SME has an option to repay early without prepayment fee as interest is calculated on a daily rate. This encourages a reduction in total note exposure. The principal amount is due only at the end of the RCF's tenor.
Simple interest returns range from 8% - 24% p.a. depending on the credit risk of the SME. Interest is billed to the SME on the note amounts utilised monthly and interest is paid out to investors 14 days later.
In what scenarios will RCF be the best product for the SME, instead of Term Financing or Invoice Financing?
A Revolving Credit Facility is useful for SMEs who have uncertainty of timing for multiple purchases from suppliers. To minimize operational delays, an overall credit line will be given and drawn down over time to pay suppliers as and when due, without having to go through the full credit process. It is also more prudent to match the SME’s requirement as and when needed.
Also, due to certain industry practices, SMEs might not be able to issue invoices to debtors without third party certification, so our Invoice Financing solution may not be a suitable solution..
It is also not suitable to provide a Term Financing with a fixed repayment schedule since the payments from the debtor are not on a fixed schedule.
You invest S$1,000 in a Revolving Credit Facility with 8% interest p.a. and the SME repays the note in 3 months.
Net Simple Interest:
8% / 12 (months) * 3 (months) = 2%
S$1,000 * 2% = S$20
Total repayment at the end of 3 months:
S$1,000 + S$20 = S$1,020
How does the tenor work if the SME is making multiple draw downs?
Example: A SME has a project starting on 1 January 2019 for which they take their first drawn down with a tenor of 12 months. Under the same RCF, they make another draw down starting 1 July 2019. The tenor of the second draw down is capped at 6 months, as there is only 6 months left of their initially approved facility.
How often do we asses the SMEs ability to repay?
At the beginning of each facility we perform due diligence to asses the SMEs ability to repay until the end of the tenor. Total exposure allowed within this facility is kept under the maximum limit originally approved.
Can a SME have multiple facilities at once time?
Yes, but each would be underwritten separately, taking into consideration their total exposure. Multiple facilities could be approved if the SME is running multiple independent projects.
Why is interest billing done on the 15th of each month and not when the SME starts the facility?
This is to help SMEs remember a single interest payment date as they may do multiple draw-downs on their RCF line, which may occur on different start dates. The goal is to help reduce late payments due to operational constraints on the SME’s end.
For investors, it is also easier to see if you have received payment, since interest payments should be paid by the 28th of every month.
This is very similar to a credit card billing payment cycle.
When is a RCF classified as default?
Similar to our BTL, 3 or more missed scheduled payments and the note will be classed as defaulted.
Why are early repayment penalties waived for RCF?
As the RCF is meant to match the SMEs’ cash flows more closely, the absence of early repayment penalties should encourage repayment of the principal as and when the SME has excess cash.
The rate of return for this investment normally falls within 8%-24% p.a., but the actual rate of return will depend on the individual offerings in question. This article provides general information on the type of investment, and you are encouraged to seek independent financial and legal advice before investing.