What is a Revolving Fund?

Revolving funds are accounts in which the assets of the fund are used for loans or other purposes, with the understanding that the expenditures are periodically replenished to allow future expenditures to take place. This ongoing cycle helps to ensure that the fund can remain in operation continually, assuming that the balance within the revolving fund is replenished according to the terms and provisions related to the expenditures. Generally, funds of this type operate without any type of annual fiscal limitation, and base activity on account balances.

In most cases, a revolving fund is created and maintained to provide resources with a specific range of activities. For example, a preservation society may establish this type of fund to create a resource that can be used to purchase real estate that has significance to the community, then resell the property with easements. The funds expended for the purchase are incrementally offset with the proceeds from the sale, allowing the fund to be self-perpetuating. In this manner, the revolving fund always has the assets needed to take on another preservation project, and repeat the same basic process.

There are revolving funds that are geared toward the extension of loans for specific purposes. An educational revolving fund provides loans for tuition and other expenses to students who meet the criteria established by the fund. Over time, those students repay the loans, providing the resources necessary to extend loans to other students who need assistance with financing a higher education. There are also niche revolving funds that assist homeowners in declining neighborhoods to make property improvements as a means of reversing the downward trend in property values, providing the resources necessary to make the improvements and allowing the owners to repay the loans with affordable monthly installments.

It is not unusual for the creation and ongoing function of a revolving fund to involve compliance with governmental regulations. Often, the fund must meet accounting standards put in place by specific governmental regulations. Since the fund may be established by a commercial entity, a non-profit organization, or a government department or commission, those same regulations generally apply in all situations.

The nature of revolving funds depends on the continual replenishment of funds that are utilized to provide financing for various projects. An interruption of that replenishment process can cause the fund to fail. For example, if the students who benefit from loans from a revolving fund fail to repay the loan balances, this means the fund may not have the resources to assist other students in obtaining an education. For this reason, most funds do establish criteria that helps to minimize this risk, while also placing internal limits on the amount of disbursements from the fund that help to maintain a minimum balance, and ensure the fund can absorb at least some interruptions in donations or other returns to the fund balance.