When it comes to finance solutions, there are lots of options available to businesses like yours. But, understanding what each type is and how it works can be tricky. One such option is revolving credit. You may have heard of it, but might not be too familiar with what it is or how you can go about obtaining it.
In this blog, our team of financial experts will explain everything you need to know about revolving credit and how you can apply with us here at Aurora Capital.
What is Revolving Credit?
In short, revolving credit (also known as a revolving credit facility) is a type of short term borrowing in which a lender agrees to a set credit limit that you can access instantaneously should you need it. For example, a lender might agree to give you access to £2,000, and you use as much or as little of it as and when you need to. When you pay off what you use, your available amount is reset and the more of your credit limit you’ll have available.
Revolving credit can also refer to the likes of a credit card wherein the balance can be passed on from month to month, although in the majority of cases, revolving credit is a term used to refer to a revolving credit facility.
How Does Revolving Credit Work?
A revolving credit agreement is like a hybrid between a credit card and an overdraft. Like a credit card, the amount you borrow can be provided by a lender and the credit is available separately from your current account, but the premise of how a revolving line of credit works is more akin to an overdraft. If you run into an unexpected expense or cash flow issue, you can access money from your revolving credit facility and borrow money repeatedly as and when you need it.
Repayments
If you do use money from your revolving credit account, you’ll need to pay it back. You’ll also be paying interest relevant to what you’ve used. There are a few ways you can do this.
- Pay in full: Your first option is to pay back the full balance. This is a good method if you’re able to afford it because it means you’ll incur less interest (like an overdraft, the longer you have an outstanding balance, the more interest you pay). However, this isn’t always possible, especially if you borrow a larger amount.
- Minimum payment: If you can’t make a lump sum payment, you’ll pay back a minimum amount per month which is decided by how much money you owe. If you pay back the money you’ve used through fixed monthly installments, this is known as revolving the balance as it carries over from one month to the next. If you make monthly payments, you’ll pay a higher interest rate as opposed to if you pay your balance in full due to the money being borrowed over a longer period of time. You’ll also have less available credit.
Fees
Setting up a revolving credit facility typically involves you paying a setting up fee. Some revolving credit facilities also require you to pay an annual subscription fee, and any late payments will incur additional fees. Interest charges and fees will differ depending on the lender, so make sure you shop around to find the best deal.
Setting Up a Revolving Credit Facility
Generally speaking, opening up revolving credit accounts is relatively easy. At Aurora Capital, we work with a range of lenders who offer this type of credit to businesses, and applying online is fast and simple.
Credit history check and setting a credit limit
You will be subject to a credit check to determine whether lenders see you as a risk, and how much they’re willing to provide you access to. If you’re wondering ‘will applying for revolving credit affect my credit score?’, the answer is yes.l A hard credit check will be carried out to determine if you’re eligible for this line of credit. The better your credit history and the higher your turnover, the more money you’ll have access to and the higher your maximum amount will be.
Whilst a credit check will take place, it is still possible for you to obtain access to a revolving line of credit if you’re a new business and don’t have a proper credit history just yet – provided you have a suitable turnover and are able to pay back what you use. As there is no collateral associated with revolving credit, most lenders will require a director of your company to sign on as a personal guarantor should you default on your monthly repayments.
All in all, it can take less than a week to get approved for revolving credit, making it a good solution if you’re in a pinch and need access to credit in a short period of time.
Benefits of Revolving Credit
There are several advantages to taking out a revolving credit facility, including:
- Easier to obtain than a business overdraft
- Affordable monthly minimum payment amount
- No penalties for paying off your balance early
- Instant access to credit should you need it (no need to keep applying)
- Diversifies your credit mix which boosts your business credit score
- Helps to build a credit file
If you’re looking for short term credit, a revolving credit facility could be ideal.
What Can a Revolving Line of Credit be Used for?
There are a number of things you can use your revolving credit balance for, but bear in mind that this is a form of short-term credit and is suitable for unexpected financial obstacles where you need money quickly but don’t necessarily have the time to wait for applications for other types of credit to go through. Some examples of when revolving credit might be used include:
- Paying for an unexpected business bill
- Replacing a piece of equipment quickly
- Making one-off purchases if you don’t have the available capital to hand
How much you use your revolving credit facility and what you use it for is up to you, but they are to be used for business related purchases only.
Revolving Credit at Aurora Capital
Interested in learning more about revolving credit facilities? Get in touch with a member of our team today to find out more about eligibility and the application process.
