What is a revolving credit facility?

What is a revolving credit facility?A revolving credit facility, commonly referred to as a revolving line of credit, is a financial arrangement offered by banks or financial institutions.

It provides individuals or businesses with a pre-approved credit limit that can be utilized repeatedly within a specified period.

Unlike traditional loans with a fixed repayment schedule, a revolving credit facility allows borrowers to access funds as needed, up to the predetermined credit limit.

The outstanding balance can be repaid in full or in part, with interest charged only on the amount borrowed and for the duration it remains outstanding.

This flexible borrowing arrangement provides convenience and quick access to funds, making it suitable for managing fluctuating cash flow needs or funding short-term expenses.

It offers financial flexibility, allowing borrowers to borrow, repay, and borrow again, all within the predefined credit limit and tenure of the facility

Revolving credit facility vs term loan

A revolving credit facility and a term loan are two distinct types of financial arrangements with different characteristics. A revolving credit facility, as mentioned earlier, provides borrowers with a pre-approved credit limit that can be used repeatedly within a specified period. Borrowers have the flexibility to borrow, repay, and borrow again, as long as they stay within the credit limit. Interest is charged only on the outstanding balance, and repayment terms can be more flexible.

On the other hand, a term loan is a loan that is provided for a specific amount, with a fixed repayment schedule over a predetermined period. The loan is typically repaid in equal installments, including both principal and interest, over the loan’s term. Unlike a revolving credit facility, once a term loan is repaid, it cannot be re-borrowed. Term loans are generally used for larger, long-term financing needs, such as capital investments, business expansions, or major purchases.

The key difference between a revolving credit facility and a term loan lies in their usage and repayment structures. Revolving credit facilities offer flexibility and convenience for short-term or fluctuating funding needs, while term loans are more suitable for long-term financing requirements and have a fixed repayment schedule.

Revolving credit facility example:

The Revolutionary Company has secured a groundbreaking revolving credit facility, granting them access to an impressive £5,000 limit. With their strategic vision in mind, the company wisely avails themselves of £2,000 from this vast financial resource, swiftly investing it in additional stock to capitalize on an upcoming seasonal peak.

Fueled by their determination to maintain financial agility, they plan to diligently repay the £2,000, along with the accrued interest, over a prudent period of two months. Once this milestone is triumphantly achieved, the company regains the power to harness the full potential of the £5,000 limit, ready to seize new opportunities on their path to unparalleled success.

It’s worth noting that the company enjoys the freedom to utilize the credit facility according to their needs, without feeling compelled to exhaust the maximum available amount.

A key advantage of this extraordinary provision is that the company only incurs interest on the actual funds utilized, highlighting the efficient and cost-effective nature of this remarkable financial instrument

Revolving credit vs credit cards

Diving into the realm of financial options, we encounter a fascinating distinction between a revolving credit facility and a business credit card, shedding light on their unique characteristics. Unlike the business credit card, which typically arrives with a convenient payment card in hand, a revolving credit facility takes a different approach.

Rather than relying on the traditional plastic companion for direct purchases, the funds from the facility are gracefully transferred into your esteemed business bank account. In this remarkable twist, a revolving credit facility assumes the role of a cash advance, seamlessly integrating into your financial landscape.

Adding to its allure, a revolving credit facility often boasts alluring advantages, including lower interest rates when compared to their credit card counterparts. The allure of this financial masterpiece lies in its ability to offer a cost-effective borrowing solution, ensuring that your entrepreneurial aspirations remain fueled by affordable financing.

Nevertheless, it’s worth mentioning that some innovative facilities, such as the esteemed Capital on Tap Business Credit Card, ingeniously combine the best of both worlds, offering the flexibility of a revolving credit facility with the convenience of an accompanying card, exemplifying the spirit of versatility and innovation.

How does a revolving credit facility work

A revolving credit facility operates on a revolving basis, providing borrowers with a predetermined credit limit that can be utilized repeatedly. Here’s how it typically works:

  • Credit Limit: The borrower is assigned a specific credit limit by the lender, which represents the maximum amount they can borrow at any given time.
  • Borrowing: The borrower can withdraw funds from the facility as needed, up to the credit limit, using various channels such as bank transfers or checks.
  • Repayment: Once the funds are borrowed, the borrower has the flexibility to repay the outstanding balance in full or make partial payments.
  • Interest Charges: Interest is charged on the amount borrowed and for the duration it remains outstanding. The interest rate can be variable or fixed, depending on the terms of the facility.
  • Revolving Nature: As the borrowed amount is repaid, it becomes available again for the borrower to use, allowing for ongoing access to funds within the credit limit.
  • No Fixed Repayment Schedule: Unlike term loans, revolving credit facilities do not have a fixed repayment schedule. Instead, the borrower has the freedom to repay and borrow as per their financial needs within the defined credit limit and tenure of the facility.

In summary, a revolving credit facility offers borrowers the flexibility to access funds on an ongoing basis, repay the borrowed amount, and borrow again as needed, within the specified credit limit. It provides financial convenience and agility, allowing individuals and businesses to manage their cash flow effectively.

Revolving credit facility and loan calculator

A revolving credit facility is a versatile financial tool that allows individuals and businesses to access funds up to a predetermined credit limit and repay them as needed. To help borrowers estimate their repayments and plan their borrowing, loan calculators can be immensely useful.

A loan calculator is an online tool that takes into account variables such as loan amount, interest rate, and repayment period to provide an estimate of monthly payments and total interest costs. Here’s how the combination of a revolving credit facility and a loan calculator can empower borrowers:

Revolving Credit Facility:

  • Flexible Borrowing: With a revolving credit facility, borrowers have the freedom to withdraw funds as needed, up to the approved credit limit, giving them access to capital on-demand.
  • Repayment Options: The facility allows borrowers to make repayments according to their financial capabilities, whether in full or through partial payments, as long as they stay within the credit limit.
  • Ongoing Access: Once the borrowed amount is repaid, it becomes available for borrowing again, providing a revolving source of funds for future needs.

Loan Calculator:

  • Estimate Repayments: A loan calculator enables borrowers to input variables such as loan amount, interest rate, and repayment term, generating an estimate of monthly repayments, helping them assess affordability.
  • Financial Planning: By using a loan calculator, borrowers can experiment with different scenarios, adjusting loan amounts or repayment terms to find a repayment structure that aligns with their financial goals.
  • Cost Evaluation: Loan calculators provide insights into the total interest costs over the loan term, allowing borrowers to evaluate the long-term financial implications of their borrowing decisions.

By utilizing a revolving credit facility in conjunction with a loan calculator, borrowers can better understand their borrowing capabilities, make informed decisions, and manage their finances more effectively.

The combination of these tools empowers individuals and businesses to access funds flexibly while maintaining financial control.

What can I use a revolving credit facility for

Embracing the dynamic nature of business finance, a revolving credit facility serves various purposes for different businesses. Some enterprises seize the opportunity to make substantial one-time purchases, while others rely on it to supplement their day-to-day cash flow.

This versatile financial tool proves invaluable in a range of scenarios, whether it’s addressing emergency repairs, covering unforeseen expenses, or managing operational costs. In certain instances, companies leverage a revolving credit facility to ensure timely payment of their dedicated workforce.

While not a constant practice, it becomes a lifeline during challenging times when additional funds are necessary until the business regains its footing. Additionally, businesses harness the power of this flexible financing solution to procure additional inventory, capitalizing on discounts or simply adapting to the growing demands of their expanding operations.

Highlighting its appeal, a revolving credit facility boasts the advantage of swift approval rates, allowing businesses to access the funds they need promptly. This accelerated process empowers enterprises to navigate financial hurdles efficiently, keeping their operations running smoothly and seizing new opportunities with agility.

Revolving credit facility loan: things to consider

When considering a revolving credit facility, it’s crucial to bear in mind that it may require a personal guarantee as a security measure for the financing. By providing a personal guarantee, you acknowledge that in the event your business is unable to meet the repayments, you assume personal liability for settling the debt. This underscores the importance of carefully evaluating the financial obligations associated with such an agreement.

It’s worth noting that unsecured loans, including revolving credit facilities, often come with higher interest rates compared to secured loans. This reflects the increased risk for the lender since there is no collateral backing the loan. It’s prudent to consider the long-term cost implications and assess whether the benefits of the revolving credit facility outweigh the potentially higher interest expenses.

Additionally, it’s common for lenders to levy setup fees when establishing a revolving credit facility. Furthermore, some lenders may escalate the interest charges in cases of late payments. As with any form of business finance, meticulous budgeting is essential to ensure that your business operates within its means, avoiding excessive spending that could strain its financial stability.

By maintaining effective financial planning and adhering to repayment schedules, businesses can maximize the benefits of a revolving credit facility while mitigating potential drawbacks.

Revolving credit facility eligibility

Lenders, taking into account the financial stability of the business and any provided security, will extend a maximum facility size for a revolving credit facility. Typically, the sole security requirement is a personal guarantee from one of the directors. This streamlined approach enables businesses to access the financing they need without undue complications.

In certain instances, there may be an upfront commitment fee associated with gaining the “right to access” the facility, in addition to the standard monthly interest charged on the funds utilized at any given time. The convenience and flexibility offered by revolving credit facilities do come with higher fees compared to fixed term loans, reflecting the value they provide to borrowers.

The term of the facility is generally limited, spanning from 6 months to 2 years. However, successful and reliable borrowers often find lenders willing to offer renewals at the end of the term, ensuring continued access to funds.

The amount a lender is willing to offer is typically determined by calculating one month’s revenue. However, in the case of robust businesses or repeat customers, lenders may consider top-ups or limit increases after only a few months. These short-term arrangements are particularly suitable for businesses that may face difficulty obtaining credit through other avenues.

For lenders, the primary consideration lies in the regular cash flow within the account. This means that for smaller deals, lenders may focus solely on the business bank account, which enables them to support new companies that have been trading for more than three months. By assessing the strength of the business’s cash flow, lenders can confidently extend revolving credit facilities to businesses in need.

Can I get a revolving credit facility with bad credit?

Yes, even if your personal or business credit history is not pristine, there is still a possibility of securing a revolving credit facility. Lenders understand that credit histories can vary, and they may be willing to consider your application with additional information. In certain cases, they may request supplementary details or documentation to gain a better understanding of your financial situation and creditworthiness.

While lenders may require extra information, such as financial statements or cash flow projections, it’s worth noting that they may also request a personal guarantee. This is a common practice in the lending industry and serves as an added assurance for the lender. By offering a personal guarantee, you demonstrate your commitment to the financial obligation and provide the lender with an additional layer of security.

Overall, lenders are often open to evaluating applicants beyond their credit histories alone. By providing the necessary information and, if required, a personal guarantee, you can still have a chance at obtaining a revolving credit facility, even if your credit history may not be perfect.

What are the benefits

A revolving credit facility offers numerous benefits to businesses. Here are five key advantages:

  1. Flexibility: One of the primary benefits of a revolving credit facility is its flexibility. It provides businesses with ongoing access to funds within a predetermined credit limit. Borrowers can withdraw and repay funds as needed, allowing them to manage cash flow fluctuations, address immediate financial needs, and seize opportunities without the need for multiple loan applications.
  2. Cost-effective Borrowing: Unlike traditional term loans, where interest is charged on the entire loan amount, a revolving credit facility allows borrowers to pay interest only on the funds they utilize. This cost-effective borrowing structure helps businesses save money by avoiding unnecessary interest charges on unused funds.
  3. Quick Access to Funds: Approval for a revolving credit facility can be relatively quick, especially for businesses with a strong credit history. Once approved, businesses can access the funds swiftly, enabling them to respond promptly to unexpected expenses, capitalize on time-sensitive opportunities, or bridge temporary cash flow gaps.
  4. Security Flexibility: While some revolving credit facilities may require a personal guarantee or other forms of security, the specific terms can vary. This provides flexibility for businesses to choose the most suitable security arrangement that aligns with their risk appetite and financial circumstances.
  5. Potential Credit Limit Increases: As businesses demonstrate their creditworthiness and repayment discipline over time, lenders may consider increasing the credit limit of the revolving credit facility. This gives businesses the opportunity to access larger amounts of financing as their needs grow, providing scalability and support for expansion or investments.

Overall, a revolving credit facility offers businesses financial flexibility, cost-effective borrowing, quick access to funds, security flexibility, and the potential for credit limit increases. These benefits make it an attractive financing option for businesses seeking adaptable and convenient funding solutions.

Lee Jones Profile
Business Finance Expert at Business Insolvency Helpline

Lee Jones is a seasoned expert in the field of business finance with over two decades of experience. With a keen understanding of financial markets and a passion for helping businesses thrive, Lee has become a trusted advisor to countless companies across the United Kingdom.