Revolving credit facilities

What is a revolving credit facility?

A revolving credit facility is a type of credit that enables you to withdraw money, use it to fund your business, repay it and then withdraw it again when you need it. It’s one of many flexible funding solutions on the alternative finance market today. 

Revolving credit facility vs term loan

Unlike a term loan, you can borrow money, pay it back, take it out again, and so on, for the agreed duration of the revolving credit facility's term. Term loans, on the other hand, give you access to funds that your business pays back, alongside interest, in accordance with a fixed repayment schedule. 

In other words, a term loan is a type of loan that is lent 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 specify how quickly you need to make repayments after withdrawing the funds. 

Revolving credit facility example:

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. 

Revolving credit vs credit cards

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.

How does a revolving credit facility work?

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. 

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What can I use a revolving credit facility for?

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.

Revolving credit facility loan: things to consider

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.

Revolving credit facility eligibility

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).

Can I get a revolving credit facility with bad credit?

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.

Benefits