So what is a revolving credit facility? Until quite recently, most businesses would turn to their high street bank for an overdraft to finance their day to day working capital needs. Nowadays, such facilities are becoming increasingly rare; however, there is a more modern and flexible alternative called a revolving credit facility.
A revolving credit facility is a pre-approved funding arrangement between a lender and a business. It provides working capital that can be used to ease any short-term cashflow pressures that the company may have. The facility will have an agreed limit, and it can be drawn down, repaid and drawn down again as and when needed.
How do revolving credit facilities work?
Revolving credit facilities typically last between six months and two years although providers will usually offer to renew a well-run facility before it ends.
Revolving credit facilities usually have higher interest rates than traditional business loans. However, if used correctly, they can work out more cost-effective because you only pay interest on the amount of money that has been drawn down at any one time. Compare this to a traditional business loan where interest is paid on the full amount of the facility all of the time.
Revolving credit facilities are also well suited to newer businesses. This suitability is because the size of the facility offered is more dependent more on the amount of available cash flow passing through the accounts each month rather than the length of the trading history.
How big a revolving credit facility could my business get?
The size of the facility that can be raised will depend on several factors. These include turnover, profitability and also the credit history of both yourself and your company. Any security that is given by the borrower will also affect the size of the facility. Although for revolving credit, security is usually in the form of a personal guarantee rather than specific assets.
Many lenders offer facilities that are equivalent to one month’s turnover. However, if you manage the facility wisely, then many lenders will increase the available funding as your business expands. That way, the facility grows as your company grows.
Would my business be eligible for revolving credit?
Revolving credit facilities are available to companies, partnerships or even sole traders. They are also much easier to put in place than other types of business funding. As long as your business is profitable and has been trading for at least three months, then you should be well placed for some level of revolving credit. However, any lender will always want to assess your business thoroughly before they commit to a credit facility.
Key benefits of revolving credit facilities
- Speed – revolving credit facilities can often be set up very quickly because the information required by the lender is usually simple and straightforward. Some lenders are now also using accounts software integration along with open banking to streamline and speed up the application process.
- Flexibility – one of the main advantages of revolving credit facilities is that the money is always there when you need it. However, the facility will only cost you money, in the form of interest, when you use it. This cash availability is particularly useful for companies that need to borrow small amounts regularly but can then repay it quickly when they get paid. It also means that if trading opportunities or unexpected bills crop up, you always have the funds available to deal with them there and then rather than chasing around trying to raise money after the event.
- Simplicity – revolving credit facilities are simple to set up as they do not typically involve any asset valuations or security other than a personal guarantee in some circumstances.
Being quick, flexible and straightforward to set up means that revolving credit facilities have become very popular with many small business owners.
Revolving credit facilities work best for regular cashflow shortfalls that only last up to a couple of weeks and are then quickly repaid. They are not designed to be used to fund longer-term debt.
So if you require any more information or are ready to move ahead with a revolving credit or another form of working capital funding, then please get in touch. Our advice is offered freely, in confidence and without obligation.
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