How revolving credit can support seasonal stock planning this August

Managing seasonal stock can be tricky, but a line of credit for businesses can offer financial flexibility. You need to have enough inventory to meet demand during busy periods, but you don’t want to tie up too much cash in stock that might not sell. This is where revolving credit comes in. It offers a flexible way to finance your seasonal stock needs, ensuring you have the right amount of inventory at the right time.

If your business experiences seasonal demand, revolving credit could be extremely valuable. It provides the flexibility to draw down funds as needed, repay them, and borrow again. This could help you manage cash flow more effectively and make sure you always have enough stock to meet customer demand.

In this article, we’ll explain how revolving credit works, the benefits it offers, and the risks to be aware of. We’ll also provide some best practices to help you make the most of it.

Key points:

• Revolving credit offers flexible access to funds, helping you manage seasonal stock fluctuations effectively

• It can improve cash flow and ensure you always have enough inventory to meet demand

• Funding Options by Tide can help when optimisation of working capital isn’t enough, offering access to business finance up to £20 million

What is revolving credit?

Revolving credit is a type of financing that allows you to borrow up to an agreed limit, repay the borrowed amount, and borrow again as needed. Unlike a traditional business loan, where you receive a lump sum and make fixed repayments, revolving credit lets you access those funds on an ongoing basis.

It’s a bit like a credit card. You have a credit limit, and you can spend money up to that limit. As you repay the borrowed amount, your available credit builds up, allowing you to borrow again. This makes revolving credit a flexible and particularly convenient option for managing seasonal stock.

For example, let’s say you have a £50,000 revolving credit facility. If you draw down £20,000 in August to buy autumn stock, you’ll only pay interest on that £20,000. Once you repay it in October after your sales come in, your full £50,000 becomes available again without needing to reapply.

Most lenders set credit limits based on your monthly turnover – typically around one month’s revenue. So if your business is turning over £100,000 per month, you might qualify for a £100,000 facility. But the exact amount will depend on your trading history, credit score, and the lender’s appetite for your sector.

Revolving credit facilities are usually used for short-term financing. They can be secured or unsecured, depending on the lender and your business’s credit profile.

• Secured revolving credit is backed by collateral, such as property or inventory, and generally has a higher credit limit for this reason

• Unsecured revolving credit doesn’t require any collateral, but generally has a lower credit limit

How can revolving credit help manage seasonal stock planning?

August creates a perfect storm of cash flow challenges for UK businesses…

The back-to-school market generates £2.3 billion in spending each year, equivalent to £450 per child. This created a seasonal demand that retailers and suppliers need to prepare for weeks in advance.

At the same time, fashion retailers face their own August pressures as they transition from summer clearance to autumn sales. Many operate on six-month buying cycles, meaning decisions made in August will determine their spring inventory.

The timing of this can create a real headache since you’ll typically need to pay suppliers in July and August, but the swell in sales won’t arrive until September or October. That 60-90 day gap between spending and sales income can strain even healthy businesses.

Revolving credit can be a powerful tool for managing ‌seasonal stock planning:

• Increased flexibility: It can provide your business with financial flexibility, allowing you to spend money as you need it (eg when you buy seasonal stock). This lets you manage your inventory more effectively and respond to changes in demand more quickly

• Free up cash flow: Using revolving credit to finance seasonal stock also helps free up cash flow for other business needs, which can be particularly useful during peak seasons when you need to invest in marketing, staffing, operational expenses, etc

• Lower borrowing costs: Revolving credit can be a cost-effective way to finance seasonal stock since you only pay interest on the amount you borrow rather than the total credit limit. And this can be cheaper than other forms of short-term financing, such as overdrafts or business credit cards

• Quick access to cash: It also typically offers quick access to funds, which enables you to respond to changes in demand quickly which can be particularly useful during peak seasons when stock needs promptly topping up

• Financial safety net: Finally, it can act as a financial safety net, providing you with access to funds if there are any unexpected expenses or cash flow shortages. So as well as giving you peace of mind, it can help manage your seasonal stock planning more effectively

Are there any risks or considerations when using revolving credit?

Revolving credit offers many benefits, but it’s important to be aware of several risks and considerations:

• Higher interest rates: Revolving credit often comes with higher interest rates than traditional loans, making it potentially very expensive if you don’t pay off your balance each month

• Variable interest rates: Some revolving credit facilities have variable interest rates, which can change over time with very little notice. This can make it difficult to predict your costs and budget effectively

• Fees and charges: There may be fees and charges to pay, such as annual fees, transaction fees, and late payment fees. So it’s important you understand these costs before you apply

• Credit limit: Your credit limit will depend on your business’s credit profile and general financial situation. It’s important therefore to make sure the credit limit is high enough to meet your seasonal stock needs

• Credit score impact: Missed payments or high utilisation rates can damage both business and personal credit ratings

• Temptation to overspend: With such easy access to cash, this might encourage poor spending decisions, particularly when there’s pressure on cash flow

• Repayment terms: Revolving credit facilities typically require minimum monthly payments, the amount of which can vary depending on the lender. So pay attention to the repayment terms and make sure that you can meet them

• Personal guarantees: Most lenders require director guarantees, which put your personal assets at risk if the business can’t keep up with repayments

Which type of revolving credit facility is right for your business?

There are several different types of revolving credit, and choosing the right one for your business will depend on several factors, including your financing needs, credit profile, and financial situation.

Here are some options to consider:

• Secured revolving credit: If you have collateral (eg a property or inventory), you may be able to secure a revolving credit facility with a lower interest rate

• Unsecured revolving credit: If you don’t have collateral, you may still be able to qualify for an unsecured revolving credit facility. These facilities typically have higher interest rates but offer more flexibility and convenience

• Business credit cards: Business credit cards are a common type of revolving credit that can also be used to help with seasonal stock planning. They offer quick access to funds and can be a convenient option for managing smaller inventory purchases

• Line of credit: A line of credit is another type of revolving credit that offers flexible access to funds. Typically available to established businesses, they can offer much larger amounts of funding into the millions. This can be a good option for managing larger inventory purchases and other business expenses

The stage of your business will have a big influence on which option makes the most sense. Startups and newer businesses often need to start with alternative lenders, building up their credit history before accessing traditional bank facilities. Established SMEs with strong financials can usually choose between traditional and challenger banks based on their specific needs.

The application requirements vary, too. For example, traditional banks often want to see 2-3 years of accounts, detailed cash flow forecasts, and detailed business plans. But alternative lenders might approve credit facilities based on 6-12 months of bank statements and more basic financial information.

What are the best practices for using revolving credit for seasonal stock planning?

To make the most of revolving credit for seasonal stock planning, consider the following best practices:

• Plan ahead: Start your planning early, ideally 6-9 months before your seasonal peak. This gives you time to research lenders, compare terms, and complete applications without time pressure. If you rush your application, you might end up with higher rates or less suitable terms

• Monitor inventory levels: Keep a close eye on your inventory levels and sales trends to help manage your stock effectively and meet demand

• Use credit wisely: Only borrow what you need and repay the borrowed amount as quickly as possible. This should help you minimise interest costs and manage your cash flow more effectively

• Communicate with your lender: It’s good to build a strong relationship with your lender, so keep them informed about your business’s financial situation and seasonal stock needs

• Review your credit facility regularly: Review your revolving credit facility regularly to make sure it still meets your needs. Then if your financing needs change, you can consider renegotiating your credit limit or exploring options with other lenders

Integrating your credit facility with your existing cash flow management is important. Lots of businesses use working capital finance to bridge gaps, but revolving credit works best as part of a larger strategy including invoice finance, trade credit, and cash reserves.

If your lender offers them, you may want to consider seasonal payment structures. For example, some providers allow higher payments during peak months and lower payments during quieter months, which can help align your outgoings with seasonal cash flow.

How can you optimise your revolving credit usage for long-term success?

The most successful businesses treat revolving credit as part of a larger financial strategy rather than an isolated borrowing tool. This means thinking beyond immediate seasonal needs to build a longer-term competitive advantage.

To optimise your revolving credit usage for long-term success, consider the following strategies:

• Build a strong credit history: Making repayments on time and managing your credit responsibly will help build a strong credit history. This could help you qualify for more competitive financing terms and higher credit limits in the future

• Diversify your financing: It’s a good idea not to solely rely on revolving credit for all your financing needs. So consider diversifying your financing with other options, such as term loans, lines of credit, and business credit cards

• Monitor your cash flow: Keep a close eye on your cash flow and make sure you have enough funds to meet all your financial obligations

• Use technology: Leveraging technology can help make managing your inventory and financing more effective. Consider using inventory management software to track your stock levels and sales trends, and use accounting software to manage your finances and cash flow

• Seek professional advice: Consider speaking with a financial advisor or accountant who can help you develop a financing strategy that meets your business’s needs and positions you for long-term success

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FAQs

How can revolving credit for stock help manage cash flow fluctuations during seasonal peaks?

Revolving credit for stock provides flexible access to funds, allowing you to draw down money as and when needed to manage cash flow fluctuations during seasonal peaks.

What are the best practices for using revolving credit to avoid overstocking or stockouts?

To avoid overstocking or stockouts, plan ahead, and forecast your seasonal stock needs carefully. Monitor your inventory levels and sales trends closely, and use credit wisely by only borrowing what you need and repaying it as quickly as possible.

How can revolving credit provide financial stability during uncertain economic conditions?

Revolving credit can act as a financial safety net, providing you with access to funds in case of unexpected expenses or cash flow shortages. This can give you peace of mind and help you manage your seasonal stock planning more effectively during uncertain economic conditions.

What advanced techniques can be used to optimise working capital with revolving credit?

Many businesses combine revolving credit with other types of finance, such as invoice finance and trade credit, to create a comprehensive working capital strategy. You could also use technology integration to optimise the timing of withdrawals, and consider seasonal payment structures that align costs with your cash flow patterns.

How can startups secure revolving credit to support their growth and seasonal inventory needs?

Startups can secure revolving credit by building a strong credit history, demonstrating a solid business plan and financial projections, and providing collateral if necessary. It’s also important to communicate with potential lenders and explore different financing options to find the best fit for your business.

What strategies can be employed to scale operations effectively using revolving credit?

To scale operations effectively using revolving credit, consider using the funds to invest in marketing, employees, and other operational expenses that can help you grow your business. Monitor your cash flow closely and use technology to manage your inventory and finances more effectively. And consider seeking professional advice to develop a financing strategy that supports your long-term growth goals.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.