Keep your business thriving and enhance your cash flow with a Revolving Credit Facility. Get an online quote today!
It’s speedy, cost-free, and won’t influence your credit score.
Understanding a Revolving Credit Facility
A revolving loan facility is a credit option provided by financial institutions that allows borrowers to access funds as needed, repay them, and then borrow again within a specified time frame.
This flexible funding arrangement differs from traditional term loans, which come with a fixed repayment schedule.
How a Revolving Credit Facility Works
Similar to an overdraft, a revolving credit facility is dynamic. When establishing the facility, your business agrees on a credit limit with the lender.
You can withdraw funds, repay them, and then withdraw again, effectively replenishing your available credit as you make payments.
The limit you can access is influenced by factors such as your business’s credit profile and financial stability, typically amounting to about one month’s revenue.
You can utilize this financing to cover significant expenses or manage smaller, ongoing costs based on your business’s needs.
One primary advantage of revolving credit facilities is that you only incur interest on the amount you draw, and the rate is fixed. Interest is usually calculated daily based on your usage.
What is the difference between a Business Revolving Credit Facility and a Business Overdraft?
Similar to an overdraft, a revolving credit facility is dynamic. When establishing the facility, your business agrees on a credit limit with the lender.
You can withdraw funds, repay them, and then withdraw again, effectively replenishing your available credit as you make payments.
However, there are distinct differences between the two:
Providers: While overdrafts are typically linked to bank accounts, revolving credit facilities can be provided by various lenders, offering more flexibility in choosing a provider.
Account Linkage: Overdrafts are directly connected to your business’s current account, allowing you to withdraw funds beyond your account balance up to a set limit. A revolving credit facility is more independent, not tied to a specific account.
Usage Cycle: Both charge interest on the amount used, but a revolving credit facility allows for a repeated cycle of borrowing, repaying, and borrowing again up to your original credit limit, truly embodying the term ‘revolving.’
Understanding these differences can help you decide which option best suits your business’s financial needs.
Example of a Revolving Credit Facility
Consider ABC Company Ltd, which has a revolving credit facility with a credit limit of £10,000.
They decide to withdraw £4,000 to purchase inventory. Over the next few months, they pay back this amount, including interest.
Once the debt is cleared, ABC Company Ltd can access the full £10,000 again, and they only pay interest on what they actively use.
How much can I borrow with a Revolving Credit Facility?
The limit you can access is influenced by factors such as your business’s credit profile and financial stability, typically amounting to about one month’s revenue.
However, the exact amount you can borrow with a revolving credit facility is not one-size-fits-all.
Customized Assessment: Lenders conduct a thorough review of your business’s unique needs and assess the associated risks before setting a borrowing limit. This means your credit limit could be tailored specifically to your circumstances.
Range of Possibilities: Depending on your situation, the amount you can borrow might range from a modest sum to a substantial figure. This variability ensures that the credit facility aligns with your business’s financial dynamics.
Potential for Increase: Demonstrating reliability and maintaining a positive credit history may lead lenders to increase your credit limit over time, offering opportunities for growth and flexibility.
By incorporating these considerations, businesses can better understand how their revolving credit facility will support their financial needs.
Benefits Of a Revolving Credit Facility
A revolving credit facility is a favored option among businesses for various reasons:
Drawbacks of a Revolving Credit Facility
Despite the advantages, there are some downsides to consider:
Suitable Uses for a Revolving Credit Facility
Revolving credit facilities can help manage day-to-day business expenses. Common uses include:
It’s especially beneficial for businesses facing seasonal fluctuations or unexpected expenses.
Qualifying for a Revolving Credit Facility
Lenders have different criteria for approving revolving credit facilities. They typically assess your financial health, credit history, and asset value. Here’s a closer look at what might be evaluated:
Credit History: A strong credit history can significantly boost your chances of approval. Lenders will examine your past borrowing habits, payment punctuality, and any previous defaults or bankruptcies.
Income Stability: Demonstrating a stable income is crucial. It assures lenders of your ability to meet repayment obligations consistently.
Existing Financial Obligations: Lenders will consider your current debts and financial commitments to gauge whether additional credit is manageable.
Purpose of the Credit: Clearly articulating why you need the credit can be beneficial. Whether it’s for business expansion or managing cash flow, a well-defined purpose reassures lenders of your intent.
Ability to Repay: Your overall financial health, including cash flow and savings, will be scrutinized to ensure you can repay the credit without undue strain.
Offering a personal guarantee may improve your chances of approval, although it does carry personal liability risks. Additionally, maintaining or improving your credit score can lead to not only approval but potentially better terms on the credit facility.
By understanding and addressing these criteria, you can position yourself more favorably in the eyes of potential lenders.
What are some alternatives to a Revolving Credit Facility?
Exploring Alternatives to a Revolving Credit Facility
When considering options beyond a revolving credit facility, there are a variety of innovative financial solutions available today. Here’s a quick rundown of some popular alternatives:
Each alternative comes with its own set of advantages and requirements. Carefully consider which option aligns best with your business goals and financial situation.
Disclaimer: Lender Portal is a credit broker that connects UK businesses with a range of lenders. We work closely with businesses and their trusted advisors to provide access to business finance solutions. While we do not provide loans or other financial products ourselves, we can introduce you to a selection of providers that may be suitable for your needs. We may receive commission from the lenders we introduce you to, should you proceed with an application, and applicants must be at least 18 years old and meet specific terms and conditions to be eligible for our services. Guarantees and indemnities may be required by some lenders as part of their lending criteria. Lender Portal is registered with Companies House (Company Number: 15871826) and is based at 71-75 Shelton Street, Covent Garden, London WC2H 9JQ. By using our services, you acknowledge that you have read and understood these terms and conditions, and agree to be bound by them. ICO number: ZB727660
