What does the capacity of a revolver typically relate to in terms of collateral?

The capacity of a revolver, or revolving credit facility, often relates to accounts receivable and inventory because these assets can be easily converted into cash or serve as secured collateral for the borrowing. In many cases, lenders assess the value of the borrower's receivables and inventory to determine how much credit can be extended through the revolver. This relationship exists due to the nature of revolving credit, where the borrower can draw down funds up to a certain limit and then repay those draws, potentially multiple times.

In contrast, while real estate assets, cash reserves, and investment securities can also serve as collateral, they do not commonly drive the specific capacity calculations for a revolver. Real estate might be used in different types of financing arrangements, usually less flexible than a revolver, cash reserves are more relevant for liquidity than as collateral, and investment securities often are not as frequent a source of collateral for revolving credit facilities compared to current assets like receivables and inventory. Thus, the most accurate correlation of a revolver’s capacity is with the liquidity and turnover metrics attached to accounts receivable and inventory.