Revolving credit facility – The short term funding solution

Revolving credit facility is a short term funding solution for business and it is one of the most useful types of business finance. 

Imagine an old-fashioned bank overdraft, but without a bank account — that’s essentially what a revolving credit facility is. 

You’ll get a pre-agreed credit limit, which is the maximum amount you can have outstanding at any one time, and pay interest on whatever is outstanding.

Usually, you’ll have an online account where you can log in, see the status of your credit facility, and withdraw funds to whatever account you like.

Like an overdraft or credit card, you can manage the balance, perhaps paying back a certain portion and then ‘topping up’ later on with another withdrawal. In fact, some providers of revolving credit facilities offer them with a business credit card included. Compare Invoice Factoring quotations as an option to a credit facility.

What is a revolving credit facility?

Revolving credit facilities are a short-term reserve of cash that you can dip into when you need. They wouldn’t necessarily be my first choice as a long-term source of funding for a specific project, but for cashflow gaps here and there they’re hard to beat.

With this in mind, revolving credit facilities are suitable for a wide range of businesses, and any firm that experiences an occasional need for short-term funding could benefit from having one set up.

How does a revolving credit facility work?

A loaning credit facility can be viewed as a form of loan, one that can be automatically renewed.

Once you reach an agreement with a lender, you may be required to pay a small commitment fee, but other than that you will not pay anything until you begin tapping into the line. You can then take out withdrawals when you need more cash. Moreover, you can make repayments whenever you like as well. Therefore, each business using a revolving facility will use it slightly differently; you may take out regular sums of money or choose to only dip into it once or twice.

You will normally have to pay a daily fixed interest rate on the amount you have taken out, not the whole credit line. This means payments are likely to be irregular as you aren’t borrowing a lump sum and being charged interest right from the word go. The payment terms of your agreement will inform you on how quickly any repayments must be made.

This is different from a fixed business loan, which allows access to loans for a specific amount of time. With that you would repay the loan in line with the rulings of the fixed repayment schedule.

The maximum amount of funding you can withdraw, known as your credit limit, will likely be the equivalent to one month’s turnover for your company. In some cases, you can receive an increase to your credit limit, but only if you have been making consistent payments on your revolving credit account.

You will find that lenders tend to offer terms anywhere from six months to two years. If you have been reliable during the time of your borrowing, you will usually find that the lender is willing to offer a renewal at the end of your agreed term.

Revolving credit facility vs term loan

The main difference between a credit facility and a term loan is that with the facility you can withdraw cash, use it to develop your company, make the required repayment and then withdraw it once again if you need to. This is unlike a term loan as they offer you funds that your business venture will have to pay back, with added interest, in alignment with a fixed repayment schedule.

Basically, a term loan lends money over a specific amount of time (the term), and a revolving facility is more flexible. Revolving facilities will place a maximum amount you can spend, but within the agreed timeframe you can borrow and pay back as much or as little as you want to each month. Your payment terms will indicate how quickly you will have to make repayments after withdrawing any money.

Advantages and disadvantages of revolving credit facility

There are a number of advantages and disadvantages to revolving credit cavities, you can find a number of these below:

Advantages of a revolving credit facility

The key advantage of revolving credit facilities is flexibility. There’s no need to tie yourself into a fixed-term agreement, but you know the money is there if you need it.

Many of the leading providers of revolving credit facilities use automated credit decisions and integrations with accounting software to make credit decisions almost instantly.

This means it’s often possible to set up your facility in a few minutes — which can make all the difference when you’re in a tough spot and need the money quickly.

Another key factor is that aside from any initial setup fees, you pay for what you use — so your facility can sit unused for months, but then be ready to go at a moment’s notice.

Disadvantage of a revolving credit facility

The main downside of revolving credit facilities is that your credit limit may not be as large as you’d like for bigger projects. The credit limit generally won’t be more than about a month’s revenue, although this will vary from business to business depending on trading history and revenue performance.

Having said that, some of the lenders in this area will agree to credit limits of £100,000 or more — but you’ll only be eligible for an amount that large if your turnover can support it.

Finally, because revolving credit facilities are a form of unsecured lending, you’ll normally have to offer a personal guarantee.

While this shouldn’t be an issue if all goes to plan, it’s important to remember that if things do go wrong you’ll be liable to pay if your business can’t.

For this reason, it’s a good idea to seek professional advice before signing a personal guarantee agreement.

Revolving credit vs credit cards

One of the differences between a revolving credit facility and business credit cards are that a revolving credit facilities don’t usually come with any type of payment card. So instead of purchasing supplies stock directly using a credit card, the funds will be transferred directly into your business bank account.

A revolving credit facility is more like a cash advance. Revolving credit facilities also have lower interest rates compared to credit cards, due to the ability of their repayment structure, you borrow the money on a shorter period. With that said, some facilities come with a card attached to them, and example of this is the Capital on Tap Business Credit Card.

Interest rates

The annual interest rates for revolving credit facilities are quite high, but they can end up being cheaper than fixed loans in real terms because you’ll use them for a few months rather than 1–3 years.

The interest rate is only one factor that affects overall cost, and the timeframe and amount are just as important. In other words, if you’re using a revolving credit facility the way it is intended, you’ll usually pay less overall because the term will be that much shorter.

Unlike a fixed-term loan with set repayments, the cost of a revolving credit facility is really in your hands — because the total interest you repay will depend on how much you borrow, and how quickly you pay it back.

Revolving credit facility example

A revolving credit facility examples is: Let’s say a Limited Company has taken out a revolving credit facility, it has an agreed limit of £10,000. It will have to pay an initial set up fee of 3%, i.e. £300.

The business has to cash to pay salaries, so has a need for cash while it is waiting for their a customer to pay an invoice. They draw down an amount of £5,000, by doing this they start to pay interest on a daily basis. After 30 days the full amount is repaid in full, by doing this the company is able to access the full credit limit of £10,000 again.

By taking out a revolving credit facility, this does not mean you have to use the maximum amount available. You’ll only pay interest on the amount you draw down.

If they pay off the £5000 in smaller amounts over a few months until the full amount is paid off, the interest repayments are still mirrored with the amount borrowed.

Revolving credit facility loan: what you need to consider

If you choose to apply for revolving credit, you should be aware that a personal guarantee will sometimes be required as a form of security for the finance. By providing a personal guarantee you are confirming that if your business ever becomes unable to make repayments, you will be personally liable for paying off the remaining debt.

Unsecured loans usually have higher interest rates than secured loans. Many lenders will also often charge an initial set up fee when you opt for revolving credit, and interest rates can become higher if you make late payments.

With that being said, as long as you continue to budget effectively, you will be absolutely fine. You will be required to budget so that you can make repayments with any form of finance.

Can I get a revolving credit facility with bad credit?

If you have a history of bad credit and often struggle to get hold of finances because of it, you are in luck. You may still be able to obtain a revolving credit facility without having a great personal or business credit history. If your credit score is particularly bad, lenders may ask for some extra information, or in some cases a personal guarantee.

F.A.Q’s

What is a revolving credit facility uk

A revolving credit facility in the UK, is when you have an allocated amount of funds say, £50,000 and you can draw down as you see fit. it is repaid back as you see fit also, you just have to ensure you can meet the interest repayments.

Are revolving credit facilities secured

Revolving credit limits are secured and unsecured. This is down to the lender and how they see fit with regards to your credit score.