A revolving credit facility can provide an effective solution for businesses with cashflow issues or short-term funding needs.

Revolving credit facilities can be particularly useful for small and medium-sized businesses which are growing and for businesses facing unexpected bills, late customer payments, or new investment opportunities that fall outside the budget.

What is a revolving credit facility?

A revolving credit facility operates much like a credit card or overdraft for a business. The lender gives the business access to a specified amount of credit which can be drawn upon as and when it is needed.

The business pays interest on the amount used (not the total value of the credit line) until it has been paid back in line with the terms of the facility agreement. The business can withdraw cash, use it, repay it (either via daily, weekly, or monthly repayments), and repeat, without needing to reapply.

How does a revolving credit facility compare to a loan or credit card?

Unlike a loan, you only pay interest on the amount you use rather than the total line of credit. In addition, revolving credit facilities tend to be offered over shorter periods than a typical commercial loan or asset finance facility (e.g.,3 months to 2 years) but sometimes there may be the option to extend the agreement if you continue to meet the lender’s terms and eligibility criteria.

Unlike a credit card, the money you borrow will be deposited as cash into your bank account.

Because they are intended for short-term borrowing, revolving credit facility interest rates tend to be higher than other types of business finance.

Why would a business use a revolving credit facility?

There are several potential ways to use a revolving credit facility, including:

• Using the cash to fund a one-off, large purchase, e.g., purchasing new equipment, assets, vehicles, or carrying out upgrades or maintenance on business premises.
• Keeping the credit on standby so it is available at short notice to cover day-to-day operational costs, unexpected bills or tax obligations.
• Taking advantage of business growth opportunities that short-term budget constraints would have made unaffordable.
• Covering seasonal declines in revenue.
• Paying employees or suppliers.

What are the benefits of revolving credit facilities?

Revolving credit facilities can deliver some significant potential benefits to businesses, including:

Flexibility

The credit is there to use if and when you need it, and you can borrow as little or as much as you need to (up to your maximum credit limit).

Pay for what you use

If you don’t use the facility, you won’t pay any interest, and you will only be charged for the days that you borrow, not the total amount of credit as you would with a loan.

Fast access to funds

Revolving credit facilities can usually be set up quickly and cash can be accessed within 72 hours, or even on the same day as your application.

Unsecured facility

In most cases revolving credit facilities are unsecured, although in some cases personal guarantees might be required.

What are the potential disadvantages of using a revolving credit facility?

It is important to consider the potential disadvantages of using a revolving credit facility.

Higher interest rates not suitable for long-term funding

Revolving credit is intended as a short-term funding solution and as such carries higher interest rates than other forms of commercial funding, and these interest rates may be increased if repayments are late.

Setup fees

There may be fees involved in setting up the facility, but this will depend on the lender.

Personal guarantees

Some lenders will require a personal guarantee which would make you personally liable for the debt if your business cannot repay the facility.

Credit score impact

Just as you would expect with borrowed money, if you fail to make the repayments or are late in making payments it may damage your business’ credit score and future finance applications.

Is a revolving credit facility right for your business?

While it has plenty of potential benefits a revolving credit facility may not be the right choice for your business’ circumstances or long-term plans. It may be that another finance solution could be a better fit, so it’s important to understand all your options and seek independent financial guidance.

From revolving credit facilities to asset finance, loans, and everything in between, we are specialists in commercial finance. With over 25 years of experience, we know how to arrange bespoke solutions that deliver stability and growth to UK businesses.

• Independent and bespoke finance solutions
• Over 25 years of industry experience
• Access to a specialist funding panel
• Whole project funding

We take a consultative approach to our relationships and making sure you have all the information you need, whether finance is the right solution for you or not, is important to us.

Contact us today to discover what our finance solutions could do for your business.

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