Everything you need to know about revolving credit facilities
When running a business or organisation of any size, securing the right types of funding at the times you need it most can be a struggle. The needs of a business change regularly, and it is entirely possible to suddenly find yourself in need of extra cash unexpectedly. Many organisations can benefit from having ongoing access to funding and that is where revolving credit facilities can help.
What is a revolving credit facility?
A revolving credit facility is an arrangement between a lender and a business where a line of credit is agreed. The lender defines a total maximum amount, and the business can access these funds as and when they need them. Usually, the business customer will be required to pay some kind of commitment fee for the use of a revolving credit facility, and they can then use the money in whatever manner works best for the business.
The line of credit will need to be consistently paid back, in order to borrow the funds again when necessary. The pre-agreed credit limit determines the maximum amount that you can have outstanding at any one time, and interest is charged on this outstanding amount.
Revolving credit facilities operate in a similar way to overdrafts and credit cards, in the sense that you can manage your balance and pay back the loan amount as and when you please.
Requirements of revolving credit facilities
Revolving credit facilities offer a reserve of cash that can be dipped into as and when you need to, making them an excellent option for businesses managing their cash flow gaps. This type of borrowing is suitable for all kinds of companies that often have a need for short-term funding.
A revolving credit facility can also be obtained by an individual if necessary, although is not hugely popular as there are plenty of alternative borrowing methods out there for personal use. Most lenders of revolving credit facilities will base the maximum amount that can be borrowed on the financial strength and situation of the organisation.
Some lenders may ask for some kind of financial security against the loan amount, such as a personal guarantee from a director. This personal guarantee means that they will be personally liable should repayments be missed or the line of credit defaults, it can result in repossession of personal belongings such as a family home or car.
As revolving credit facilities are a short-term financing option, they are often available to businesses that might usually struggle to be approved for credit. Lenders will often only look at the businesses bank account and current financial position, without running full credit checks and considering trading history; this makes revolving credit facilities a good option for new businesses with a limited track record.
What can I receive with a revolving credit facility?
Most revolving credit facilities are limited to a term of between six months and two years, usually with an option to review at the end of the predetermined term. As they are a highly convenient and flexible way of borrowing, the fees and interest rates are often higher than with alternative borrowing methods.
Every revolving credit facility provider will have their own way of determining the maximum limit that any business can borrow, and usually, this is calculated as one month’s revenue. Many lenders will offer borrowers an increase in the limit after a few months if repayments are being made on time and the business is strong.
Advantages of revolving credit facilities
- The flexibility of a revolving credit facility is a huge benefit to growing businesses that sometimes need to cover gaps in their cash flow.
- Most revolving credit facility providers can set up the line of credit quickly and effortlessly; some lenders can even release funds the same day as the application.
- Small amounts can be borrowed and paid back on a regular basis, and there is no need to apply or set up a new agreement every time.
- Having ongoing access to funds whenever you need them can help a business to keep their supply chain happy and maintain healthy stock levels.
Negatives of revolving credit facilities
- As a short-term funding solution, revolving credit facilities often work out expensive as interest rates can be high and commitment fees need to be paid as well.
- The credit limit may be smaller than you need for large projects, as it is usually calculated as one month’s revenue for the business.
- Some lenders will ask for a personal guarantee which can put your personal assets at risk of repossession if repayments aren’t made.
Revolving credit facilities provide a convenient and reliable funding option to help businesses grow and evolve over time. If you are considering a revolving credit facility for your business, be sure to carefully consider all the options available, and find out about all necessary interest rates and fees before committing to a final decision.