A revolving credit facility is a lending tool which allows borrowers to access funds as and when they need it.
Most traditional long-term business loans will offer a lump sum upfront payment, with regular repayments required over a fixed term. However, a revolving credit facility allows more flexibility in allowing withdrawals and is much better suited as a short-term business loan.
For any business looking to improve its cash flow and increase liquidity, a revolving credit facility is a popular option.
In this article, we will be explaining how revolving credit facilities work, what the different types are, and why you might want to get one for your business.
If you’re looking for a loan for your business, but you’re not sure where to start, then you can get a quote from us at Rise Funding. It’s completely free and will not affect your credit score.
How does a revolving credit facility work?
A revolving credit facility works in much the same way as a credit card. After a lender has approved a credit limit, borrowers can withdraw funds as needed, up to the preset limit. Interest is only paid on the amount that you use, rather than the total credit limit. The term “revolving” refers to the cyclical nature of withdrawal and repayment, with funds becoming available for use again and again.
Revolving credit facilities can be a great option for businesses that aren’t sure exactly how much they need to borrow. Borrowers can make partial payments towards their borrowed amounts, as long as they are over the minimum payment requirements.
Interest is only charged on the outstanding balance, and whether interest is calculated daily or monthly depends on the credit agreement.
Depending on the agreement, the revolving credit facility may only be open for use for a certain period of time. This is typically subject to an annual review.
What are the different types of revolving credit facilities?
Revolving credit facilities come in many forms, and they can be tailored to suit individual financial needs. Here are the most common types available for businesses.
Business revolving credit facilities
Business revolving credit is often used to help manage cash flow, cover operational expenses or provide financing for a short-term project.
They are often useful for businesses that have an unexpected expense that needs to be covered immediately, but they are unsure of the amount. A revolving credit facility provides a great source of funding that can cover these gaps.
Personal line of credit
Similar to an overdraft facility in a personal bank account, personal lines of credit can be used to cover emergencies, unexpected expenses or large purchases like a home renovation. Typically these credit limits will be smaller than those available for businesses.
Benefits of a revolving credit facility
A revolving credit facility can be a great option to fill cashflow gaps and access quick liquidity. Here are some of the benefits.
Flexibility
The ability to draw funds when needed is an ideal solution for those with fluctuating expenses. While traditional loans require a lump sum to be given, revolving credit provides easy-access funds on demand.
Cost efficiency
As interest is only charged on the borrowed amount, you never pay interest on unused funds. Money is therefore saved when compared to traditional loans.
Convenience
Revolving credit facilities are greatly suited to emergencies or unexpected costs due to their ability to be accessed quickly.
A solution to cash flow problems
Particularly for businesses, with many demands to meet such as payroll, inventory purchases or debt to vendors, revolving credit facilities can help to balance uneven cash flow.
Credit-building tool
Like many credit facilities, regular payments towards a revolving credit plan can help to improve your credit score. A revolving credit facility can be a way to demonstrate that you are capable of regular payments and have sufficient cash flow for future loans.
Downsides to revolving credit facilities
As with all credit, some risks come with using revolving credit facilities.
Additional fees
One downside of a revolving credit facility is that they can come with a non-utilisation fee – in simple terms if you don’t use it enough, you will be charged.
For the balance of the approved credit limit that isn’t being used, a small fee can be charged. This is typically quite small, but can add to expenses over time.
There may also be setup, renewal or limit exceeding fees to consider, in addition to the interest charged.
Difficult to obtain
Revolving credit facilities are uncommon, and there aren’t very many providers of them. Therefore, they are difficult to obtain.
For the providers that do offer revolving credit facilities, they will expect security with it, which means they will require heavy security, such as a property. Typically you have to be a homeowner if you want to obtain a revolving credit facility.
High interest rates
When compared to secured loans, revolving credit facilities can come with higher interest rates, particularly for unsecured facilities, although the rates can in some cases be similar.
Due to the rare nature of revolving credit facilities, lenders will often charge higher fees and require greater security compared to other forms of lending, so the general costs may be higher.
Over-reliance
Those who rely on credit facilities may become overly reliant on these services if only minimum payments are made. It is important to consider your circumstances and speak to financial professionals before engaging in any credit facilities.
Example usage of revolving credit
Imagine you are running a small business, operating seasonally. During your off-peak periods, income will be much lower than your peak season. For maintaining liquidity in these times, revolving credit can be particularly useful, especially when unpredictable costs occur like emergencies or future projects that require funding.
Revolving credit can act as a safety net to handle these situations without disrupting cash flow.
As an example, in November 2024, Great Portland Estates PLC, a British property development and investment company announced it had signed a new £150 million unsecured revolving credit facility.
Tips for managing your revolving credit facility
Only borrow what you need – avoid unnecessary expenses. Once you’re able to pay off your balance, do so quickly to avoid interest costs. Regularly check your credit utilisation to keep it within healthy limits. Treat it like a tool, for managing short-term needs rather than a long-term solution.
You can consult Citizens Advice for any further guidance on borrowing best practices.
Conclusion
A revolving credit facility offers individuals and businesses flexibility and convenience compared to a traditional loan. For problems like cash flow management, project financing, or unexpected expenses, a revolving credit facility is the ideal choice for your financial needs.
However, only select this facility having understood the associated risks, like potentially higher interest rates, or overreliance on the facility. If your financial needs have been carefully evaluated and you manage the facility responsibly, it can prove to be a powerful financial tool.
If you are looking for a loan, but aren’t sure what to go for, then Rise Funding you can get an instant business quote in seconds.
You can also use the form below to find the business funding that you need.
