Revolving credit facilities are a kind of working capital finance. Like overdrafts, you can access approved funds as required, and interest can be typically charged on the amount withdrawn while it is outstanding. Revolving credit facilities can be a better alternative to overdrafts, which used to be readily available with the high street banks but are hard to find these days.
How does it work?
Revolving credit facilities are not a fixed business loan, but a rolling agreement.
Obviously, each provider will have varying terms, but usually, you’ll be given payment terms that specify how long after drawing funds you need to make repayments, and you’ll also have a credit limit in the same way you would for a business credit card or bank overdraft.
Once you’ve repaid an amount of money, you can withdraw more ergo the term ‘revolving’. The easiest way to think about revolving credit facilities is that they’re a type of loan that can be automatically renewed.
How can I get a revolving credit facility?
Lenders will offer a facility based on the financial strength of the business and any (if required) security offered. Sometimes the only security will be a director’s guarantee. Typically, there are no setup or arrangement fees, but in some cases, you may find a commitment fee taken upfront for ‘right to access’ the facility, plus the standard interest charged on funds drawn down at any one time.
Due to their convenience and fluidity, revolving credit facilities will typically have higher fees than fixed-term loans. The term will also likely be limited to between 6 months and 2 years — though you can averagely expect 12 months as standard. However, if all goes to plan (as Hannibal used to say), a lender will typically offer a renewal at the end of the term or a facility review which may see the facility remain and in some cases an increase in the facility amount.
The amount a lender may consider is typically calculated as one month’s turnover, however, some may offer a maximum facility based on 10% of turnover.
As they are generally 6 to 24-month arrangements, revolving credit facilities are often used by businesses that would otherwise struggle to find credit. A main worry for the lender is the amount of regular cashflow through the account, meaning for smaller facilities they may consider just the business bank account, and will often be able to support new businesses.
Why would I choose a revolving credit facility over a fixed-term loan?
One of if not the best advantage of a revolving credit facility is the flexibility. They can be very useful for businesses that need to occasionally dip into an overdraft-style pot of funds. They generally come with a much higher interest rate than a typical term loan, but, used wisely & correctly they can be cheaper in real terms.
Revolving credit facilities are exceptional when used to cover specific cashflow gaps for a week or two or even a month or two, which means you’re interest is calculated for a matter of days or weeks, rather than for many months or years as you would with a fixed-term business loan. In other words, having revolving credit means you only pay for what you use when you use it.
One of the other key benefits of revolving credit facilities is how fast they can be to set up. Automated credit decisions and even integrations with accounting software mean that for some sectors, credit decisions can be instantaneous. With some lenders, you may even be able to have funds on the same day as the application.
With a revolving credit line in place, you know you’ll be able to cover short-term expenses if new opportunities or unexpected bills crop up.
Another point to note 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 very useful for businesses that need to borrow small amounts regularly, rather than a larger amount for a specific project. In most cases, just a quick refresh of financial statements will ensure continued use of the facility if you’re not a frequent user.
Another benefit of revolving credit facility is that as far as security is concerned, a directors personal guarantee will typically be enough, if your business is strong enough, it may be no security is required at all.
Many businesses require funding for more specific reasons such as a new equipment purchase or commercial property finance, revolving credit facilities can typically run alongside additional funding lines and can be used for more general business cash flow management.