What is a Revolving Credit Facility?
Written by James Dutton
Key Takeaways
- A revolving credit facility gives a business access to a set amount of funding that can be drawn, repaid and drawn again as needed, rather than being paid out as a single lump sum.
- It's typically used to smooth out short-term cash flow gaps or cover unexpected costs, rather than fund larger, long-term investments.
- Facilities are usually arranged over shorter terms than a standard business loan, and interest is only charged on the portion of funds drawn.
What is a revolving credit facility?
Not every funding need fits neatly into a single lump sum paid out once and repaid on a fixed schedule. Some businesses need funding that can be called on repeatedly, in varying amounts, as circumstances change. A revolving credit facility is built around exactly that kind of flexibility, giving a business an agreed credit limit it can draw against, repay, and draw against again, rather than a one-off advance.
How does a revolving credit facility work?
Once a facility is agreed, a business is given access to a pre-approved credit limit rather than a fixed sum. Funds can be drawn as and when needed, up to that limit, and as repayments are made, the amount available refreshes and becomes accessible again. This cycle of drawing and repaying can continue for the life of the agreement, without needing to reapply each time funding is required.
Interest is generally only charged on the portion of the facility that's in use, rather than on the full credit limit, which sets it apart from a standard term loan where interest applies to the whole amount from day one.
What can a revolving credit facility be used for?
Because of how it's structured, a revolving credit facility tends to suit shorter-term or recurring funding needs rather than one-off capital projects. Common uses include:
- Managing seasonal dips in trading
- Covering a temporary gap between outgoings and incoming payments
- Settling a tax bill or other unexpected cost
- Funding stock or materials ahead of a busy period
- Bridging cash flow while waiting on customer payments
How much can a business access, and over what term?
Facility size and term vary considerably between funders and depend on the financial strength of the business involved. Revolving facilities are generally arranged over shorter periods than a term loan, often somewhere between a few months and a couple of years, though many can be renewed or extended provided repayments have been maintained and the business continues to meet the lender's criteria.
Who qualifies for a revolving credit facility?
Eligibility criteria differ from lender to lender, but funders will typically look at:
- Trading history and turnover
- Cash flow and overall financial stability
- Existing borrowing and how it's being managed
- Business structure, as some facilities are limited to companies rather than sole traders
Benefits of a revolving credit facility
- Funds can be accessed repeatedly without a fresh application each time
- Interest is only paid on the amount drawn, not the full limit
- Decisions and drawdowns tend to be faster than with longer-term lending
- Facilities are often available without requiring specific asset security
Things to consider with a revolving credit facility
Cost: interest rates on revolving facilities can run higher than secured, longer-term borrowing, and some funders apply additional charges for late repayment.
Suitability: the shorter-term, flexible nature of a revolving facility generally makes it less suited to funding large, long-term investments than a term loan or asset finance.
Personal guarantee: many funders will ask for a personal guarantee from a director or shareholder as a condition of the facility.
Eligibility: some revolving credit products are only available to limited companies, which can limit access for sole traders and partnerships.
What other finance options are worth considering?
Where a revolving facility isn't the right fit, a few alternatives may be worth exploring:
Working capital loan: provides a fixed lump sum aimed at covering day-to-day running costs, rather than a facility that's drawn and repaid on an ongoing basis.
Unsecured business loan: offers a one-off sum based on the creditworthiness of the business, without requiring specific security.
Stocking finance: operates on a similar revolving principle but is tied specifically to funding stock or inventory, making it a closer fit for businesses like dealerships or retailers.
Why use a finance broker for revolving credit?
Facility limits, fees, interest rates and eligibility requirements vary considerably across the revolving credit market, and not every funder will be the right fit for every business. A broker working across a wide panel of lenders can help match a business to a facility suited to how it operates, rather than the business needing to compare providers individually.
MAF Finance Group can compare offerings from a wide range of banks and alternative funders to help find a facility tailored to your circumstances.
To learn more or get a quote, fill out the form below. If you'd like to speak to someone directly, call us on 0115 858 1010 and a member of our team will be happy to help.
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