Revolving credit facilities are a type of working capital finance. As with overdrafts, you can access pre-approved funds as required, and interest is usually charged on the amount withdrawn while it is outstanding. Revolving credit facilities are a good alternative to overdrafts, which used to be common with the high street banks but are hard to find these days.Get working capital
A revolving credit facility is a type of credit that enables you to withdraw money, use it to fund your business, repay it and withdraw it again when you need it. It’s one of many flexible funding solutions on the alternative finance market today.
Unlike a term loan, you can borrow money, pay it back, take it out again, and so on, for the agreed duration of the term. Term loans, on the other hand, give you access to funds that your business pays back in accordance with a fixed repayment schedule.
In other words, a term loan is a type of loan that a lender gives out for a specific amount of time (the term). With a revolving facility, the lender stipulates the maximum amount you can spend, however within that you have the freedom to decide how much you borrow and pay back every month.
Your payment terms will also specify how quickly you need to make repayments after withdrawing the funds.
The Smith Company has taken out a revolving credit facility that has a limit of £5,000. The business withdraws £2,000 to buy some extra stock ahead of a seasonal peak. After purchasing it, they plan to repay the £2,000 plus interest, over the next two months. Once they’ve paid it off in full, they can access the full £5,000 once more.
Bear in mind that you don’t have to use the maximum amount available and you’ll only pay interest on what you use.
One of the most significant differences between a revolving credit facility and a business credit card is that facilities don’t usually come with payment cards. So instead of purchasing stock (for example) directly using a credit card, the funds are transferred into your business bank account.
In this sense, a revolving credit facility is more akin to a cash advance. Also, the majority of revolving credit facilities have lower interest rates compared to credit cards. That said, some facilities come with a card attached to them, such as the Capital on Tap Business Credit Card.
The simplest way to think about revolving credit facilities is that they're effectively a type of loan that can be automatically renewed. During the length of the agreement, you can make numerous withdrawals and repayments whenever you need additional funding. You might use it regularly or just one or two times — no business is the same and it’s up to you.
Interest rates are fixed and are usually paid daily, enabling you to manage your cash flow effectively. The limit that you can withdraw is likely to be the equivalent of one month of turnover for your business. The lender will also take your business credit history and financials into account when making a decision.
Revolving credit facilities are almost always used for the short-term. Generally speaking, they last from anywhere between six months to two years. As long as you keep up with the repayments and everything is okay in the eyes of the lender, you may be able to extend it.
While some businesses use a revolving credit facility to make a one off large purchase, others dip into it when they need to supplement their everyday cash flow.
They can be used for things like emergency repairs, bills, or to cover the cost of unforeseen circumstances. Whether you need funding to bridge short-term cash flow issues or supplement operating expenses, you can use the Funding Options platform to see what you might be eligible for.
Some companies use revolving credit to pay their employees’ salaries. Not necessarily all the time, but in instances where they require the additional funds until their business gets back on its feet again. Others use it to buy additional stock in order to obtain discounts or simply because their business is growing and they need the extra inventory.
One of the benefits of a revolving credit facility is that approval rates are relatively quick.
If you opt for a revolving credit facility, keep in mind that you might have to provide a personal guarantee as security for the finance. By offering a personal guarantee, you are agreeing that if your business can’t make the repayments, you become personally liable for paying off the debt.
Unsecured loans tend to have higher interest rates than secured loans.
Some lenders also charge fees for setting up the revolving credit facility and others increase the interest charged when late payments are made. As with any type of business finance, it’s important to budget effectively to ensure that your business isn’t spending more than it can afford.
Fortunately, you may still be able to get a revolving credit facility without a tip top personal or business credit history. The lender may ask for additional information and in some cases, a personal guarantee.
Lenders will offer a maximum facility size based on the financial strength of the business and any security offered. Typically the only security will be a director's personal guarantee.
In some cases, there is a commitment fee taken up front for ‘right to access’ the facility, plus the standard ongoing monthly interest charged on the funds drawn down at any one time.
Because of their convenience and flexibility, revolving credit facilities tend to have higher fees than fixed term loans. The term will also likely be limited to between 6 months and 2 years — however, if all goes well, a lender will typically offer a renewal at the end of the term.
The amount a lender will look to offer is typically calculated as one month’s revenue, however in the case of strong businesses or repeat customers they may offer a top-up or an increase in the limit after just a few months.
As they are generally short-term arrangements, revolving credit facilities are often available to businesses that would otherwise struggle to find credit.
The main concern for the lender is the amount of regular cashflow through the account, meaning for smaller deals they will often look at just the business bank account, and will often be able to support new companies (trading more than 3 months).
A great advantage of a revolving credit facility is the flexibility, and they can be very useful for growing businesses that need to occasionally dip into an overdraft-style pot of funds. Although they generally come with a much higher interest rate than a typical term loan, used correctly they can be cheaper in real terms.
Revolving credit facilities are best used to cover specific cashflow gaps for a week or two, which means you're only paying interest for a matter of days, rather than for months or years as you would with a fixed business loan. In other words, having revolving credit means you only pay for what you use.
One of the things business owners most appreciate about revolving credit facilities is how fast they can be to set up. Automated credit decisions and integration with accounting software means that for some sectors, credit decisions are instant. With some lenders, it's even possible to draw funds on the same day as the application.
And with a credit line in place, you know you'll be able to cover short-term costs if opportunities or unexpected bills crop up.
Another difference between credit lines and loans is that revolving credit lines don’t have to be set up under new agreements each time you use them. This can be really handy for companies that need to borrow small amounts regularly, rather than a larger amount for a specific project.
Another benefit of credit lines is that they don’t require security or asset valuations — your business will go through one application process, and once the facility is set up, you can use it until the agreement is updated or changed.
Revolving credit facilities are similar to old-fashioned bank overdrafts, but many have benefits like online dashboards and automated credit decisions, which means they’re usually more sophisticated options.
Keeping your suppliers happy means you’ll have a reliable source for maintaining healthy stock levels, which in turn allows you to concentrate on fulfilling customer orders. In other words, if you have a good supply chain, your business can flourish in turn.
Your suppliers will appreciate being paid on time, preferably on short payment terms, for regular orders. Having a reserve of working capital allows you to pay them on time — or up front — for big or urgent orders.
A revolving credit line fulfils this purpose well for many firms that rely on a supply chain, for example ecommerce businesses or companies using Amazon Seller Central.
Many businesses also take advantage of trade finance or supply chain finance to help them manage supply chain funding. These funding types can be used for specific orders or projects, while the revolving credit facility can be used for more general business cashflow management.