What is a business revolving credit facility?
Revolving credit facilities are flexible lines of credit, designed for small and medium-sized businesses. They provide working capital finance to the business, easing any pressure on cash flow.
Although there are now specialist lenders offering bespoke facilities, historically, the main type of revolving credit used by business owners was the overdraft. With overdrafts now more difficult to secure than they once were, more and more business owners are turning to flexible lines of credit through alternative sources.
How do they work?
Revolving credit, as the name suggests, is not a static loan like a standard business loan. They operate in a similar way to an overdraft or credit card, in so much as you may borrow some money, repay it, and then draw it back down as and when you need it.
You will usually have a pre-agreed funding limit, which is determined by the strength of your business and its ability to repay the debt, once drawn down.
Interest is usually charged on a daily basis, depending on how much money is outstanding on that day. That means you only pay for the money as you use it. Revolving credit facilities usually come with no long-term commitment, meaning you can use it just once, to cover a blip, or regularly as part of running your business.
How do they compare to traditional business loans?
A traditional business loan is a fairly static facility. Funds are borrowed in full and then repaid each month through a set monthly repayment figure.
Revolving credit allows you to borrow and then repay as needed, as mentioned above.
There is no ‘best’ product for every situation, instead, each product will work better in some situations, with the other being better in others.
Loans are a great way to inject a lump sum of cash into a business to fund a large, one-off expense, or to consolidate other debts.
Revolving credit is generally a better solution for adding a cash ‘float’ which can be dipped into and repaid regularly.
Will I qualify?
Specialist revolving credit can be much easier to a secure than other types of business loan, and far easier than an overdraft from a major bank.
If your business is profitable and has been trading for three months or more, then you would theoretically be eligible for some level of revolving credit. Of course, a full assessment of the business would be required to guarantee funding.
The amount that you’re able to borrow will depend on the strength of the business, the turnover, cash flow and the credit history of the business and owners. Previous adverse credit doesn’t mean you definitely can’t secure a business revolving credit facility, but further information would be needed to assess your eligibility.
How quickly can I access the funds?
We are often able to get a credit-backed decision for customers within 24 hours of your application. The finance will usually be complete, and funds drawn down into your bank account within 2-3 working days, where your application is successful.
For some sectors, and with certain lenders, credit decisions can be almost instant, and funds are drawn down on the day of application, others can take a little longer.
The pros & cons of revolving credit facilities
- This is a highly flexible form of funding. Unlike a business loan, you only take the money when you need it and can repay and draw back down as often as you like.
- Only pay interest when you use the money, rather than for the life of the facility. Unlike other forms of credit, you only take the funds as you need them.
- The facility can grow with your business. If your business continues to expand and your account is well conducted, there is a good chance that the lender will extend your facility, allowing you to draw down more money.
- Funds can be drawn down very quickly, sometimes often within a couple of days of your application being made. Traditional business loans usually take around five days to complete, and asset-backed loans much longer.
- There is no long-term commitment, funds can be drawn down only once if needed and the facility never used again.
- The interest rates charged on revolving credit facilities are higher than those charged on traditional business loans. Although this is somewhat offset by the fact that you only pay interest on the funds when they’re drawn down.
- If you’re likely to draw down most of the funds in your facility and not repay them for some time, the interest charged is likely to be higher than with other products.
- Revolving credit facilities usually run for 1-2 years at a time, although they are often renewed if well conducted. If you’re looking for longer-term funding, another type of commercial finance may be right for you.
How long can I borrow for?
Revolving credit facilities can in theory be open ended. In most cases, your facility will be agreed for a term of 6-24 months.
Some facilities reduce gradually each month, until it reaches £0 at the end of the term, whereas others remain fully operational for the full term.
When would I use revolving credit?
Revolving credit is primarily designed for situations whereby you need to borrow funds to cover periods of tight cash flow.
You can take out a facility for almost any purpose, although if it’s going to be used as longer term debt, then you may find that a business loan or merchant cash advance works out cheaper.
When comparing the offers from different providers, it’s important that you also consider the costs associated with different product types to ensure that you’re getting the best deal.
What documents will I have to provide?
Each lender will have their own requirements, although in general, the application process will see you fill in an online form. If working with us, we will complete the forms with you over the phone.
The lender will usually also require sight of your accounts and business bank statements. PDF copies are usually acceptable and can be emailed or uploaded to the relevant portal.
What can my facility be used for?
Think of it as a cash advance for your business, the funds are effectively yours to use and repay to suit you.
As you draw down funds, they go into your business bank account and can be used for any legal purpose that you wish.
The facilities are designed to act as an extension to your own funds, in much the same way as an overdraft.
How will my credit limit be decided?
Again, each lender will have their own methods of deciding the exact figure. In general the credit limit will be decided based on the following:-
- The trading performance of the business.
- The credit history of both yourself and the business.
- An assessment of recent bank statements.
- Consideration around likely future trading performance.