For businesses, maintaining a secure cash flow is vital. You need it to ensure your daily operations can carry on without a hitch – but sometimes, and for any number of possible reasons, your organisation may need a little extra cash injection at short notice. This is where revolving credit lines can prove tremendously helpful.
A revolving credit facility is a particular type of business loan which is broadly comparable to a business overdraft. It enables you to withdraw the capital you need to carry out your plans, repay those funds, and withdraw money again, as and when your business needs it. For many business owners, this method of finance is a preferable line of credit, owing to its flexibility and convenience.
In today’s blog post, we’ll take a look at revolving credit facilities in a little more detail, understand, ‘what is a revolving credit facility’ and consider how they compare to overdrafts and term loans. We’ll then move on to the way they work, a few points to keep in mind, and your best bet for finding the highest-quality revolving credit facility for your business.
Revolving Credit Facilities vs Overdrafts vs Term Loans
As a business owner, there are many cash flow finance plans and traditional business loans available to you. While each serves the basic function of securing funds for your business when necessary, these options do vary slightly.
Revolving credit facilities
So, what is a revolving credit facility? With a revolving line of credit, your business will be able to withdraw cash, pay it back when convenient, and take out more capital, up to your credit limit and within the term of the facility. These are stipulations you’ll agree with the lender beforehand.
Unlike with many traditional loans, you will only pay interest on the drawn amount, making a revolving credit facility a truly flexible funding solution. You are not obliged to borrow a fixed amount, or anything at all, and you’ll have the freedom to decide exactly how much you pay back (with interest) every month.
Revolving credit means your business can overcome seasonal dips and cash flow challenges, or it can help bridge the gap when you’re looking to grow.
Business overdrafts
An overdraft is another type of business loan that can help you navigate seasonal trends and short-term financial challenges.
In many ways, an overdraft works in a similar way to revolving credit: you borrow the capital you need to pay expenses and deal with unexpected bills, within an agreed credit limit, and make repayments (plus interest rates) once those funds become available. The primary difference is that, while revolving credit tends to be offered by a lender, business overdrafts tend to be facilitated by your bank.
Additionally, you might see many organisations only dip into their overdraft when their business bank account balance reaches zero. On the other hand, with revolving credit, you’re free to borrow money at any time, and may do so again and again, within the term of your facility.
Term loans
As the name suggests, a term loan is a funding option subject to a fixed period of time. It will give your business access to the necessary funds, which will be lent for a specific amount of time. You’ll be required to pay it off, along with interest, according to a fixed repayment schedule.
In the eventuality that your business needs to borrow additional funds, you’ll have to contact the financial institution to arrange another term loan.
A Revolving Credit Facility: How it Works
So now we know what a revolving credit facility is, how exactly does it work? Essentially, a revolving credit line is a business loan that can renew automatically. You’re free to make as many, or as few, withdrawals and repayments as you see fit, and according to the particular business situation you’re in. There is no ‘set’ way to use revolving credit. Where some organisations utilise it regularly, others may only use it once or twice.
Typically, you will only pay interest on the drawn amount, according to a pre-agreed and fixed interest rate.
Invariably, revolving lines are a short-term financial solution, usually running from about 6 months up to a couple of years. If everything goes according to plan, the lender will probably offer an extension at the end of the contract.
You may wish to seek revolving credit for a number of reasons, including:
- To bolster day-to-day cash flow
- To make one large purchase
- To cover the costs of an emergency
- To pay unexpected bills
- To pay staff salaries
- To purchase larger quantities of stock (possibly to become eligible for a discount)
As an example, let’s say the Jones & Williamson company takes out a revolving credit facility with a limit of £15,000. The business owners take out £5,000 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 carry out the refurbishment and repairs successfully, and plan to repay the full £7,000 plus interest over the next 3 months. At this time, they’ll be free to access the £15,000 revolving credit once again.
Things to Keep in Mind
As with all business loans, there are a few pointers regarding revolving credit lines that it’s wise to be aware of. These should not be taken as warnings or disadvantages, but rather as ‘good-to-know’ information, tips to help you make the most informed decision and get the full picture.
- Providing a personal guarantee
Often, revolving credit lenders will require a personal guarantee to secure the funds. This effectively means that, should your business become incapable of repaying the loan, you take on the responsibility. Generally speaking, a loan which is secured by a personal guarantee will have lower interest rates than an unsecured loan. - The maximum facility size
As we mentioned earlier, the lender will likely stipulate the maximum borrowable amount of your facility. This is often equivalent to one month’s average turnover, though it is variable, depending on the financial robustness of your business, as well as the security you offer. - Associated fees
This is one point where many businesses are initially unaware. Being a short-term financing option with built-in convenience and flexibility, there are often specific fees that you take on up-front with revolving credit, in addition to interest repayments.
For example, many lenders will ask for a ‘right to access’ fee, a commitment fee you accept to cover the immediacy of available funds. You may also incur early repayment fees, and it’s worth noting that there tend to be higher standard fees with a revolving credit facility.
- Maximum loan term
The chances are that any revolving credit facility will be limited to a period of between 6 months and 2 years. With that said, it’s likely that the lender will offer you a renewal at the term’s conclusion, providing nothing has gone awry.
What if I Have Bad Credit?
Revolving credit facilities are a practical and convenient funding solution for organisations that may otherwise have a tough time securing a loan. One reason a business may struggle to get a loan is that it has a poor credit history.
Fortunately, it’s often possible for a business to acquire revolving credit – even in the absence of a strong personal or business credit history. This makes it a fantastic option for business owners who have been through challenging times in the past. In lieu of that credit history, though, the lender may wish to see some additional information, or ask for a personal guarantee.
Revolving Credit Facilities: Finding the Perfect Fit for Your Business
Business owners seeking a funding option which is flexible and convenient would do well to find a better solution than a revolving credit facility. It gives you immediate access to exactly the amount of funding you need, and allows you the freedom to control how much, and when, you pay back. Moreover, unlike other ‘one and done’ 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’re dedicated to sourcing the very best financial solutions for enterprises both great and small.