What is a revolving credit facility?

Businesses with short-term funding needs, such as unexpected bills, a cash flow gap, or a business growth opportunity, may benefit from accessing revolving credit.

Throughout the growth of a small or medium-sized enterprise, there may be times when a short-term need for funding arises.

That is when revolving credit could help.

This form of flexible finance offers businesses credit as and when needed.

However, revolving credit facilities won’t suit all businesses and all funding requirements.

This guide outlines how revolving credit works, the advantages and disadvantages, and how to find a lender most suited to your needs.

When looking at finance options it’s a good idea to first seek independent and specialist financial advice, as individual circumstances will vary.

What is revolving credit?

Like overdrafts and credit cards, revolving credit is a flexible funding option that enables businesses to withdraw credit when required to pay for business activities.

Once it has been repaid according to the terms and conditions of the agreement with the lender, the finance can be used again when the business needs it.

Revolving credit has a fixed interest rate, and repayments are usually required daily, weekly, or monthly.

It tends to be available for short periods of three months to two years, but you may have the option to extend the agreement if you make all your repayments on time and you continue to meet the lender’s eligibility criteria.

Unlike credit cards, you don’t use a physical card to make payments with the money deposited straight into your bank account.

Why should small and medium-sized businesses consider revolving credit?

Revolving credit could be useful for various business reasons.

If you want to make a large one-off purchase, such as buying new equipment or vehicles, it could provide the funding you need, while many business owners apply for revolving credit so they have it to hand when they need it for day-to-day cash flow needs.

This could be for unexpected bills and cash flow challenges such as losing a key customer, repairs to a property, a seasonal decline in sales, or settling a business tax bill.

There may be business growth opportunities you’ve identified that revolving credit could pay for, so you don’t miss out.

It could also be used to pay employees, suppliers, and other creditors.

Read our guide to protecting your cash flow from seasonality.

What are the benefits of revolving credit?

There are several potential benefits and advantages of revolving credit.

Flexibility

Due to it being a flexible form of funding, revolving credit can be helpful for businesses that want to access finance as and when they need it.

Pay for what you use

With revolving credit, you only pay interest for the money you use.

You’ll only be charged for the days you withdraw funding rather than for the total amount of credit, such as you’d find with term loans.

Speed of access

Applications for revolving credit are usually dealt with quickly due to the software many lenders use.

You might even receive the required funding on the same day you apply.

No security needed

Most lenders do not require security or assets with your application.

What are the drawbacks of revolving credit?

There are potential drawbacks to using revolving credit to be aware of.

High interest rates

Revolving credit tends to have higher interest rates than other forms of funding, and some lenders charge extra interest if repayments are late.

This could cause cash flow problems for your business.

Fees

Revolving credit providers tend to charge fees for setting up the facility, adding extra costs.

Personal guarantee

You may need to give a personal guarantee to apply for revolving credit successfully.

This means you will be personally liable for the debt if your business cannot meet the repayments.

Impact on credit score

Like any debt, failing to repay the money you borrowed or making a payment late could negatively impact your business’ credit score and limit your ability to access funding in the future.

Eligibility

Revolving credit is usually only available to limited companies, so sole traders may find it hard to access.

Not for the long term

Due to the high interest rates and short lending periods, revolving credit is usually unsuitable for long-term funding requirements.

How to choose the right revolving credit option

Before applying for revolving credit, it’s advisable to think about whether it’s the right option for your business.

Conduct some research to compare what funding is available to your business and seek out specialist independent finance advice.

It’s important to remember that revolving credit is not a long-term solution, and due to high interest rates, a business loan or another funding solution could be a better choice for your business.

If you decide revolving credit is the right solution for your business, search online for lenders, read customer reviews, and speak to other business owners for recommendations.

Business membership groups may have partnerships with revolving credit lenders that you can take advantage of.

It’s always a good idea to compare fees, interest rates, and eligibility criteria.

Make sure you understand when you are expected to repay the credit and if any extra fees will be charged for late payments.