Revolving Credit Facilities
Revolving credit facilities are a type of working capital finance. As with overdrafts, you can access pre-approved funds as required, and interest is usually charged on the amount withdrawn while it is outstanding. Revolving credit facilities are a good alternative to overdrafts, which used to be common with the high street banks but are hard to find these days.
How does a revolving credit facility work?
Revolving credit facilities get their name from the fact that they're not a fixed business loan, but rather a rolling agreement.
The terms vary, but usually you'll have payment terms that specify how long after drawing funds you need to make repayments, and you’ll also have a credit limit in the same way you would for a business credit card or bank overdraft. In fact, some revolving credit facilities come with a card attached to them, such as the Capital On Tap Business Rewards Credit Card.
Usually, once you've repaid a certain amount of money, you can withdraw more — hence the term 'revolving'. The simplest way to think about revolving credit facilities is that they're effectively a type of loan that can be automatically renewed.
Eligibility & Criteria
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).
A great advantage of a revolving credit facility is the flexibility, and they can be very useful for growing businesses that need to occasionally dip into an overdraft-style pot of funds. Although they generally come with a much higher interest rate than a typical term loan, used correctly they can be cheaper in real terms.
Revolving credit facilities are best used to cover specific cashflow gaps for a week or two, which means you're only paying interest for a matter of days, rather than for months or years as you would with a fixed business loan. In other words, having revolving credit means you only pay for what you use.
Quick decisions — set up within hours
One of the things business owners most appreciate about revolving credit facilities is how fast they can be to set up. Automated credit decisions and integration with accounting software means that for some sectors, credit decisions are instant. With some lenders, it's even possible to draw funds on the same day as the application.
And with a credit line in place, you know you'll be able to cover short-term costs if opportunities or unexpected bills crop up.
No need for new agreements
Another difference between credit lines and loans is that revolving credit lines don’t have to be set up under new agreements each time you use them. This can be really handy for companies that need to borrow small amounts regularly, rather than a larger amount for a specific project.
No security required
Another benefit of credit lines is that they don’t require security or asset valuations — your business will go through one application process, and once the facility is set up, you can use it until the agreement is updated or changed.
Online portals for ease of use
Revolving credit facilities are similar to old-fashioned bank overdrafts, but many have benefits like online dashboards and automated credit decisions, which means they’re usually more sophisticated options.
Can help you keep your supply chain happy
Keeping your suppliers happy means you’ll have a reliable source for maintaining healthy stock levels, which in turn allows you to concentrate on fulfilling customer orders. In other words, if you have a good supply chain, your business can flourish in turn.
Your suppliers will appreciate being paid on time, preferably on short payment terms, for regular orders. Having a reserve of working capital allows you to pay them on time — or up front — for big or urgent orders.
A revolving credit line fulfils this purpose well for many firms that rely on a supply chain, for example ecommerce businesses or companies using Amazon Seller Central.
Can be used alongside other funding types
Many businesses also take advantage of trade finance or supply chain finance to help them manage supply chain funding. These funding types can be used for specific orders or projects, while the revolving credit facility can be used for more general business cashflow management.
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