What Are Examples Of Revolving Fund?

What are Revolving Funds?

A revolving fund is a fund or account that is replenished as money is spent out of it. The concept is similar to a line of credit, where spent money can be borrowed again once it’s repaid. With a revolving fund, money that is spent out of the fund is later replenished by payments back into the fund.

Here’s how a revolving fund typically works:

– An initial amount of money is set aside to start the revolving fund. This money acts as the beginning “principal” amount.

– Money is spent out of the revolving fund to finance various projects or expenses. As money is paid back into the fund, it can then be spent again on new projects.

– The fund is replenished through different sources depending on the type and purpose of the revolving fund. Common sources are loan repayments, fee collection, grants, and interest earned.

– The balance cycles up and down as money flows in and out, but the fund balance should never drop below zero. The goal is to keep money continually cycling through the fund.

In essence, a revolving fund leverages its principal amount to provide ongoing financing as repayments are cycled back in. The same pool of money can be used repeatedly to fund a variety of designated projects and activities over time.

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Types of Revolving Funds

Revolving funds are generally categorized into two main types: internal revolving funds and external revolving funds.

Internal revolving funds are funded and managed within an organization. The money for these funds comes from an organization’s budget and is set aside for a specific purpose, such as funding energy-efficiency projects or employee training programs. As money from the fund is spent, repayment and interest are put back into the fund to finance the next round of projects or activities. Internal revolving funds provide organizations with an ongoing, sustainable source of financing for priority initiatives.

External revolving funds are administered by one organization or agency to finance projects for other organizations. For example, a governmental agency may establish a revolving loan fund to provide low-interest loans to small businesses for expansion projects. As loans are repaid, this money goes back into the central fund to finance new loans. External revolving funds allow the administering organization to leverage and recycle funds to serve a particular public purpose or target population over an extended period of time.

The key difference between internal and external revolving funds is where the money resides – within a single organization or cycled through a central agency to multiple organizations, respectively. But both types of funds take a sustainable finance approach to dedicate funds for ongoing investment in key priorities.

Benefits of Revolving Funds

Revolving funds provide numerous advantages that make them an attractive financing option for organizations and initiatives. Some of the key benefits of revolving funds include:

Self-Sustaining Resource

Once established, a revolving fund becomes a renewable resource that can provide funding year after year. After the initial seed money is repaid, the repaid funds can be loaned out again to support new projects or recipients. This creates a sustainable funding cycle.

Cost Savings

By recycling funds within an organization, revolving funds reduce or eliminate the need to continually seek new sources of funding. This saves considerable time and effort spent applying for grants, fundraising, or requesting appropriations.

Flexibility

Revolving funds allow greater flexibility in how money is used over time. Funds can be loaned to different projects and priorities versus being restricted to a single use case when externally donated or granted.

Accountability

The payback requirement creates accountability and responsibility for the recipients of the funds. This can lead to higher performance and better outcomes for projects utilizing revolving funds.

Challenges of Managing Revolving Funds

Introducing and maintaining revolving funds come with some challenges that organizations should be prepared for:

One common challenge is that revolving funds need strong oversight and management. Without proper governance and monitoring, revolving funds can quickly become mismanaged. Organizations need to institute controls and regular reviews to ensure the fund is used appropriately and replenished as expected. There should be clear guidelines around loan criteria, repayment terms, interest rates, and acceptable uses of the fund.

Additionally, leaders must ensure there are capable staff members responsible for managing the revolving fund. This includes tasks like reviewing applications, administering loans, tracking repayments, enforcing policies, and reporting on the fund’s use and impact. Without qualified personnel overseeing the fund, it risks being misused or diminished.

Examples of Internal Revolving Funds

Internal revolving funds are set up within an organization to finance ongoing operations. Two common types of internal revolving funds are office supply funds and vehicle funds.

Office Supply Funds

An office supply fund is used to purchase supplies like paper, pens, printer ink and other items needed to run day-to-day operations. Employees make purchases from the fund throughout the year. The money spent is replenished on a regular basis from the organization’s budget. This allows for easy tracking of office supply expenses rather than submitting individual reimbursements.

Vehicle Funds

A vehicle revolving fund is used to purchase and maintain cars, trucks and other vehicles owned by the organization. The fund pays for repairs, gas, insurance and other costs related to operating the vehicles. Usage fees are collected from departments that use the vehicles to replenish the fund. This spreads transportation costs across departments based on actual usage rather than allocating a set transportation budget to each department.

Examples of External Revolving Funds

External revolving funds involve raising money from outside an organization to fund projects or operations. Here are some common examples of external revolving funds:

Loan Funds

Loan funds are one of the most common types of external revolving funds. These funds provide low-interest or interest-free loans to individuals or organizations for specific projects or needs. As the loans are repaid, the money is loaned back out to new recipients. Examples include:

Microfinance loan funds that provide small loans to entrepreneurs in developing countries.

Affordable housing loan funds that finance low-income housing projects.
Small business loan funds that provide capital to women-owned or minority-owned businesses.
Agriculture loan funds that assist farmers with equipment purchases or upgrades.

Investment Funds

Some revolving funds operate as investment funds, where the money is invested and the returns are used to replenish the fund. Examples include:

Social impact investment funds that invest in companies driving social change.
Green energy funds that invest in renewable energy companies and projects.

Venture philanthropy funds that provide capital to nonprofits to develop revenue-generating activities.
Local economic development funds that invest in businesses creating jobs in disadvantaged communities.

Revolving Funds vs. Sinking Funds

Revolving funds and sinking funds are two types of reserve funds that organizations use to set aside money for specific purposes. However, there are some key differences between the two:

Purpose

Revolving funds are designed to be self-sustaining pools of money that get replenished as funds are used. Sinking funds are meant to be drawn down to zero over time as the money is used for a specific project or expense.

Funding

Revolving funds rely on internal repayment of loans or investment returns to sustain the fund balance over the long term. Sinking funds are typically funded by regular contributions over a period of years to cover a known future liability or capital project.

Availability of Funds

The balance in a revolving fund remains available to be loaned out again after repayments are made. Once a sinking fund is fully drawn down, it ceases to exist.

Ongoing Viability

Well-managed revolving funds can operate indefinitely. Sinking funds are designed to be depleted and are not meant to be perpetual sources of funding.

So in summary, revolving funds are designed for longevity while sinking funds are for shorter-term savings goals. Revolving funds are replenished through internal mechanics while sinking funds rely on ongoing external contributions.

Implementing a Revolving Fund

Setting up and managing a revolving fund takes thoughtful planning and execution. Here are some key steps for implementing a successful revolving fund:

Define the Purpose and Goals

First, clearly identify the purpose and goals of the fund. This could be financing small capital projects, facilitating energy efficiency upgrades, or supporting professional development. The purpose will shape many aspects of fund management.

Establish Parameters and Guidelines

Determine what types of expenditures the fund will support, the process for departments to access funds, repayment terms, and other guidelines. Make sure parameters align with the fund’s goals.

Identify Funding Sources

Explore potential sources for the initial capitalization and ongoing replenishment of the fund. This may include budget allocations, grants, energy savings, or other recurring revenue streams.

Create a Governance Structure

Define oversight responsibilities for managing the revolving fund. This may include an administrator and cross-departmental committee to evaluate requests and oversee accounting.

Promote and Track the Fund

Market the fund to potential users. Develop processes to track fund activities, repayments, and impact. Monitor performance to identify successes and opportunities.

Re-evaluate and Optimize

Periodically assess the revolving fund to ensure it is meeting goals efficiently and make any needed policy adjustments to optimize operations.

Best Practices for Managing Revolving Funds

Implementing proper oversight, policies, and transparency are critical best practices for managing revolving funds effectively:

Oversight – Revolving funds should have clear oversight procedures and assigned staff responsible for fund management. This provides accountability and ensures the fund is used appropriately according to its purpose.

Policies – Solid policies should be in place dictating how the revolving fund operates, including loan criteria, payback terms, interest rates, and consequences for late or missing payments. Well-defined policies prevent misuse of funds.

Transparency – Revolving funds should maintain transparent accounting practices and reporting procedures. This allows stakeholders to review fund activities and ensures resources are allocated fairly and responsibly.

Additional best practices include establishing a committee to govern fund use, integrating with the organization’s accounting system, tracking metrics like loan repayment rates, and conducting periodic audits. Following these procedures leads to successful and sustainable revolving fund management.

The Future of Revolving Funds

Revolving funds are becoming increasingly popular due to their flexibility and sustainability. As more organizations learn about the benefits of revolving funds, their use is likely to grow across various sectors.

Some key areas where revolving funds may see expanded use in the future include:

Community development – Revolving loans for small businesses, affordable housing, infrastructure, etc.

Environmental sustainability – Funding renewable energy projects, energy efficiency retrofits, recycling programs, etc.
Public health – Ongoing funding for preventative health and wellness programs.
Education – Renewable scholarships and bursaries.

Agriculture – Loans for equipment, seeds, livestock.
Government – Infrastructure maintenance and improvements.

As revolving funds become more widespread, we may see the development of best practices and standardized approaches for their implementation and management. Overall, revolving funds allow organizations to sustainably fund and scale impactful programs.