Maintaining a secure cash flow is vital to running any business. You need it to ensure your daily operations can continue without a hitch, but sometimes, you may need an extra cash injection at short notice. This is where revolving credit lines can help.
How does a revolving credit facility work?
A revolving credit facility is a type of business loan similar to a business overdraft. It gives your business ongoing access to funds that can be drawn, repaid, and borrowed again as needed.
This flexibility makes a revolving loan facility a practical choice for managing cash flow and covering short-term expenses without having to apply for a new loan each time.
Typically, you only pay interest on the amount you withdraw, making them an ideal solution for unexpected expenses or fluctuating costs.
Revolving credit facilities are short-term financial solutions that usually last three months to a couple of years. In many cases, the lender will offer an extension at the end of the contract.
An example of a revolving credit facility
A company takes out a revolving credit facility with a limit of £15,000. The business owners then draw £5,000 from the facility to cover the refurbishment cost of a new property.
However, due to exceptionally heavy rainfall, they incur emergency repair costs of £2,000, which they also withdraw from the facility.
The business owners completed the refurbishment and repairs, and then repaid the full £7,000, plus interest, over the next three months. At this time, they can once again access the full £15,000 revolving credit limit.
Why use a revolving credit facility?
A revolving loan facility gives your business access to flexible funding that can help manage cash flow and take advantage of opportunities without taking out multiple loans. This type of credit is beneficial for:
- Managing cash flow: If your income is seasonal or your customers pay on long terms, a revolving credit facility can help cover any gaps and keep your operations running.
- Covering unexpected expenses: Quick access to funds means you can address urgent repairs, resolve supplier issues, or manage sudden increases in demand without disrupting your plans.
- Taking advantage of opportunities: Having a source of credit you can access at short notice lets you move quickly, whether it’s a time-limited deal on stock, a new project, or a growth initiative.
- Avoiding multiple loan applications: Instead of applying for new finance each time you need extra funding, a revolving credit facility is an ongoing credit line you can use repeatedly.
Because it’s designed to be drawn and repaid as needed, a revolving credit facility can be a cost-effective way to maintain business flexibility and reduce strain on your finances.
Alternatives to revolving credit facilities
If a revolving credit facility isn’t the right fit, there are other ways to access flexible working capital:
Here’s an overview of the different working capital finance options available:
- Short-term business loans: These are received as a one-off lump sum you repay in regular instalments over a term of between 1 and 24 months, but it is possible to borrow for longer.
- Merchant cash advances: Funding that is repaid automatically through a percentage of your card sales. Payments fluctuate in line with your turnover.
- Invoice finance: This enables you to access the cash tied up in unpaid invoices, allowing you to maintain a stable cash flow while waiting for customers to settle their accounts.
- Business overdrafts: Similar to revolving credit, an overdraft allows you to access extra funds from your business bank account as needed.
These alternatives can be effective if you’re looking for smaller sums, short-term solutions, or funding that doesn’t require an ongoing credit facility.
What’s the difference between a revolving credit facility and an overdraft?
Both revolving credit facilities and business overdrafts provide flexible access to working capital, but they do work differently. Understanding how they differ can help you choose the right option for your business.
Revolving credit facilities
A revolving credit facility is an agreed line of credit from a lender that you can draw from, repay, and borrow again up to a set limit.
You decide how much to use and when, paying interest only on the amount you’ve drawn. There’s no obligation to borrow the full facility, and repayments can be made at a pace that suits your cash flow, as long as you meet the minimum terms agreed with the lender.
This flexibility makes revolving credit an ideal choice for covering seasonal fluctuations, managing cash flow, or funding short-term growth without the need to apply for a new loan each time.
Business overdrafts
A business overdraft is a facility linked to your business bank account that allows you to spend more than your available balance, up to an agreed limit.
With an overdraft, you can draw funds automatically when your account balance runs low, without having to make a separate loan application each time.
You’ll usually pay interest only on the overdrawn amount, and there may be an annual or monthly arrangement fee depending on your bank.
Because it’s tied to your bank account, an overdraft can be convenient and quick to access, but it’s not as flexible as some alternative lending options.
The key differences between revolving credit and overdrafts are:
- Provider: Overdrafts are arranged with your bank, while revolving credit is usually offered through business finance lenders.
- Access: Overdrafts are typically used when your account balance is at zero, while revolving credit can be drawn upon proactively at any time.
- Flexibility: Revolving credit facilities often allow higher limits, longer terms, and more tailored repayment options than most business overdrafts.
For businesses needing predictable, reusable access to funds beyond what their bank offers, a revolving credit facility can provide greater control and scalability.
Pros and cons of revolving credit facilities
Revolving credit facilities can be a flexible and practical way to manage working capital, but it’s important to understand both the advantages and disadvantages before you commit.
Pros of revolving credit
- Flexible borrowing: Access what you need, when you need it, and repay at least the minimum amount as agreed.
- Interest on funds used: You only pay interest on the amount you’ve withdrawn, not the entire facility.
- Reusable credit line: Once you repay, you can borrow again without reapplying, making it easier to manage ongoing cash flow needs.
- Costs can be lower than overdrafts: Facilities can potentially offer more competitive rates or higher limits than a bank overdraft.
Cons of revolving credit
- Personal guarantee: Many lenders require a personal guarantee, meaning you’re personally liable if the business is unable to repay the facility.
- Maximum facility size: Lenders set a credit limit, often based on one month’s average turnover and the overall health of your business.
- Associated fees: In addition to interest, you may incur commitment fees to maintain the facility, as well as early repayment or renewal fees.
- Shorter terms: Facilities are usually agreed for 6–24 months. Many lenders will allow you to renew if you have demonstrated your ability to manage the line of credit.
Can you get revolving credit with bad credit?
Many lenders are willing to offer a revolving credit facility even if your business credit history isn’t perfect. These facilities are often more flexible than traditional loans, making them a viable option for businesses that have struggled to secure financing elsewhere.
If your credit score is low, the lender will typically review your recent financial activity, including bank statements and cash flow, to assess whether the facility is affordable.
In some cases, a personal guarantee may be required. This means you agree to take personal responsibility for repayment if the business is unable to pay. Still, it can help you secure approval and access better rates or a higher limit.
Is a revolving credit facility right for your business?
If you’re looking for a flexible and convenient funding option, a revolving credit facility could be the perfect solution.
It enables you to access the funds you need when you need them. It also gives you the freedom to control how much and when you pay back.
Unlike other funding options, businesses can utilise revolving credit as many times as they need within the term of the loan.
If you’re interested in applying for a revolving line of credit, get in touch with Aurora Capital today. Our business loan calculator can show you your options instantly, and we can help you find the right financial solution for your business.
