13 Nov 2020
If you’re looking for a flexible type of finance, a revolving loan (or revolving credit facility) could be the right solution for you. This alternative type of business finance allows you to withdraw money as and when your business needs it. Revolving finance can help you to alleviate cash flow challenges and invest in its future.
A revolving credit facility is similar to an overdraft in that your business can withdraw money when it needs it. For instance, you can use it for purchasing additional stock or replenishing wages. It’s a type of working capital loan that is suitable for a range of SMEs.
It can be particularly useful for businesses who are struggling with cash flow due to seasonal dips or unpredictable events that have a negative impact on the business. As with an overdraft, revolving credit facilities aren't static - you can withdraw funds, repay and withdraw again. You’ll be assigned a pre-agreed limit by the lender.
As you make the repayments, your funds are replenished and ready for you to make use of again, hence the term ‘revolving’. How much money you can access will depend on factors such as your business’ credit history and its financials. Broadly speaking, you’ll be able to access the equivalent of a month’s worth of business revenue.
How you use your revolving credit facility is totally up to you.
You might decide to utilise it for a number of smaller expenses or one larger payment. You can choose to make use of it regularly or on a one-off basis as a short-term funding option for your business. Some revolving credit facilities come with a card attached to them, such as the Capital On Tap Business Credit Card.
A revolving credit facility is similar to a term loan in that it provides access to a certain amount of capital over an agreed time period. Both are typically ‘committed’ facilities, which mean that as soon as the agreement has been executed, the lender must advance the money when requested, as long as the loan’s conditions are agreed to by the borrower.
As with term loans, the business provides the lender with a drawdown notice and they must specify a chosen interest period (these are usually three or six months long).
Yet in some ways, a revolving loan is more akin to an overdraft because its availability period spans the life of the loan - until it’s due to be repaid at the very end. Revolving credit facilities tend to be more flexible than term loans. Term loans have a set payment schedule over a number of months or years.
You can also usually borrow more through a term loan, however it often takes longer to qualify for term debt.
A payday loan isn’t the same as revolving credit. A payday loan is a type of short-term finance designed to allow individuals to access money to tide them over between paychecks in situations, for instance, where they have to meet emergency costs such as a boiler repair.
Generally speaking, they are for smaller amounts (£100 to £1,000). When taking out a payday loan, people risk falling into what’s called the ‘payday loan trap’ where they can’t pay it back on payday, so it carries over. The fees add up and they feel like they can’t get out, which can make the situation significantly worse.
There are plenty of short-term loan options out there for businesses. Starting at £1,000, short-term loans have short repayment terms, are usually unsecured and interest rates can range between 5% to 10%.
To understand unsecured loans, it helps to know what a secured loan is. With a secured loan, the business offers collateral for the loan, usually in the form of an asset such as a property, equipment or machinery. This increases the lender’s level of ‘security’.
Unsecured loans, on the other hand, aren’t secured by assets, potentially making them more viable for businesses who don’t own many assets or don’t want to offer collateral. Unsecured loans tend to have higher interest rates. Examples of revolving unsecured loans include business credit cards and lines of credit.
A revolving loan fund is described in the finance world as a pool of liquidity that can be loaned to one business at a time. Once the business in receipt of the loan pays it back, it can be loaned back out to another business. As will a revolving credit facility, a revolving loan fund is a flexible finance solution that self-replenishes.
Revolving loan funds make the most of interest and principal payments on old loans to issue new ones. It begins by an organisation or individual making a contribution that forms the initial capital required.
Most of the revolving loan funds out there today are designed to help local businesses to grow. Others are targeted to certain sectors or niches, for example to enable sustainable practices. As with a revolving loan, it is termed ‘revolving’ because once a project pays back the loan, the fund can issue a new one to be allocated to another project.
Business can use a loan from a revolving loan fund alongside other forms of business finance. Quite often, revolving loan funds are utilised by businesses who can’t borrow the full amount that they need, and the fund acts as a bridge. The London Green Fund is an example of a revolving loan fund.
You can use the Funding Options platform to search for a revolving loan. Simply tell us how much you need, what for and how quickly, and our algorithm will compare over 120 lenders. As well as revolving credit facilities, we can also match you with a whole range of alternative finance options, from business credit cards to bridging finance.
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