Are you looking for a way to get access to quick cash without the lengthy and inconvenient process of taking out a loan? Then a revolving credit facility could be what you need. But what is it, and how do you go about getting one?
From how to get a revolving credit account to whether you’re eligible for one, we’ve got all the information you need right here. Don’t forget to check out our handy FAQ section for even more advice about getting revolving credit. If you’d like to know more, then just keep scrolling.
What Is a Revolving Credit Facility?
A revolving credit facility, or an RCF, is a form of business capital financing that lets you seamlessly withdraw money if you need to finance your company. You then repay it when you can. You’ll be given a business credit limit like you would if you had a bank overdraft or a commercial credit card.
It’s popular with businesses that want to give their finances a boost, so it’s ideal as a short-term funding method that you’ll be able to quickly pay off. Revolving credit lines are similar to open-ended loans. You’ll be able to borrow funds, pay them back and borrow more throughout the agreed term length.
Put simply, when you’ve repaid the money you withdrew, you can take out more – which is where the term “revolving credit” comes from.
Your lender will tell you how much you’re allowed to spend, which is your business’s credit limit. Then you’ll be able to choose the amount of money you withdraw and repay every month.
How Can I Get a Revolving Credit Facility?
In the past, businesses would only be able to apply for corporate credit agreements by turning to traditional lenders such as banks. Although banks accommodate large established companies, small-to-medium businesses and start-ups may struggle to meet the meticulous criteria.
The rise of alternative financing means that there’s been a surge in specialist lenders who provide these services. If your business needs a cash flow boost:
- Find an RCF lender that’s suitable for your company.
- Decide on a limit you’d like and apply online. You’ll need to provide some business and personal verification details as potential lenders will look at how strong your business is.
- Once you’ve been given your agreement details, check how much interest is charged, the included fees, and the terms of repayment.
After you’ve signed the documentation and set up an account, many revolving credit facilities tend to provide access to the funds in just a few hours.
The Main Types of Revolving Credit
Revolving line of credit
A simple definition of revolving credit facilities is that they’re essentially a type of loan that will automatically renew. During the agreement, you can perform multiple withdrawals and repayments each month when you need extra cash.
You can use it constantly or just a few times a month. Every business is different, and it’s up to you how often you use it. You’ll have fixed interest rates, and they’re typically paid daily, allowing you to effectively manage your cash flow. Your lender will also take your business credit history into account when they make their decision.
Non-revolving line of credit
The term “non-revolving” means that the credit facility will be provided on a one-off basis and paid out fully. The borrower will usually make regular instalment payments against the agreed credit limit. The most common way a non-revolving credit line is provided is through a secured or unsecured business loan.
If you receive approval for your working capital loan application, you’ll be given a lump sum which is the principal loan amount. You’ll then repay it over a certain term, which could be between 1-5 years.
How Does a Revolving Credit Facility Work?
Revolving credit facility example
Examples of revolving credit include credit cards, and business and personal lines of credit. Although credit cards are a useful form of revolving credit, there are many differences between business or consumer credit cards and revolving credit facilities.
The first difference is that you don’t have a physical card with revolving credit like you would with a credit card. Rather, a line of credit is usually accessed through your bank or other lender.
How long does a revolving credit facility agreement last?
Revolving credit facilities will usually be used in the short term, and they can last from 6 months to 2 years. As long as you keep the repayments up and the lender is happy with the agreement, you might be able to extend it.
Is My Business Eligible for a Revolving Credit Facility?
Revolving credit lenders will look at your business credit score as well as your personal financial history to paint a picture of how big of a risk you may be. Ultimately, lenders care about your business’ cash flow.
Because of this, if you only want a small facility, the lender may only look at your business bank account, which can be an advantage if yours is a new company. But, you need to have been trading for at least three months.
Revolving credit facilities are usually short-term agreements, so if you’ve found it difficult to find credit in the past, this type of service may be right for you.
How Much Can I Borrow?
The amount you can borrow, known as a credit limit, usually equates to one month’s turnover from your company. If you’re a repeat client or a substantial business, you may be offered a bigger credit limit after you’ve proved yourself to be a reliable customer.
You can do this by regularly and consistently repaying your revolving credit. In this sense, the product is dynamic compared to non-revolving credit facilities.
What Can I Use a Business Line of Credit for?
You can use a revolving credit facility to cover your business’ everyday costs. So whether you’re looking for fast cash to fund an unexpected expense or you need to make some smaller purchases, revolving credit could be a great option for you.
Many businesses use revolving credit to pay employee salaries, particularly if your company has quiet periods and you need to fill the gaps until things pick up again. Revolving credit facilities can also be used for replenishing stock levels as bulk buying can sometimes give your business great discounts.
Can I Get a Revolving Credit Facility If I Have Bad Credit?
Although you’ll be offered a better maximum amount if you have good credit, you may still be able to get revolving credit with imperfect business or personal credit.
But, the lender is likely to request additional financial information, and sometimes a personal guarantee may be needed as security.
Remember that if you are the one providing the personal guarantee and the company fails to keep up the repayments, you’ll be liable, personally, for paying the debt.
We strongly recommend you get professional advice if you’re considering offering any security such as personal guarantees.
How Does a Revolving Credit Facility Differ From Credit Card and a Term Loan?
As we mentioned before, one of the most significant differences between revolving credit facilities and credit cards is that the facilities don’t tend to include a payment card. For example, instead of buying stock directly using the card, the money is sent to your company bank account.
So how does revolving credit differ from term loans? Unlike a loan, an RCF allows you to borrow money, repay it and take it out again and this pattern can continue for the duration of your agreement. But term loans provide funds that your business will repay as well as interest, observing a fixed repayment schedule.
Put simply, a term loan is a loan type that’s lent for a certain period. With revolving credit, the provider specifies the maximum amount of money you’ll be able to spend. But, you’ll have the freedom to choose how much you borrow and repay each month.
Revolving Credit Facility Set-Up Fees
You may have to pay a commitment fee upfront for the “right to access” the credit line. After you’ve paid that, you’ll pay a standard interest on the money you withdraw.
This will compensate the provider for ensuring access to the potential loan is open. The commitment fee may be either a fixed percentage or a flat fee. It’s usually 1% of your borrowing capacity; however, it may vary between lenders and the length of the commitment.
What Interest Rate Can I Expect to Pay for a Revolving Credit Facility?
Like any method of borrowing money, the interest rate will depend on how big of a risk you pose to your lender, for example, your business’ financial circumstances.
If you can provide security such as a director’s personal guarantee, you’ll have lower rates to pay than you would if you had an unsecured facility.
The Pros and Cons of a Revolving Credit Facility
- No early repayment fees
- It’s very flexible
- It’s a quick source of cash
- You only pay interest on what you’ve drawn down
- It’s more affordable than using a business credit card.
- It’s not usually suitable as a long-term financing option
- There may be a commitment charge
- You’ll pay a higher interest rate than a fixed business loan
- It’s not suitable for new companies with limited turnover and trading experience.
Can a Revolving Credit Facility Affect My Credit Score?
Just like any form of credit, if you don’t keep up with your RCF repayments, it could affect your credit score. Fortunately, there are plenty of ways to ensure an RCF doesn’t give you bad credit, such as:
- Paying off the outstanding balance each month to show you’re a responsible customer
- Not making numerous applications for RCF
- Keeping the balances low, if possible.
Who Offers a Revolving Credit Facility
Revolving credit facilities are offered by financial institutions, the most common one being banks. However, many emerging companies specialise in providing revolving credit, including Just CashFlow, iwoca, and FIBR.
But, which one will suit you depends on your business and personal circumstances and the size of your company.
Hopefully, this article has given you all the information you need about revolving credit for your business. Ultimately, it can be a very affordable and convenient financing option for companies in need of quick cash.
If you’re not sure if your business is eligible, many financial institutions provide free revolving credit facility checks to help you decide if it’s a suitable solution for you.
Is a revolving credit facility short-term or long-term debt?
An RCF is nearly always used as a short-term solution. The agreements are usually between 6 months and 2 years. But, you may be given the opportunity to extend it at the lender’s discretion.
How does a revolving credit facility differ from an overdraft?
The difference between an RCF and an overdraft is that an overdraft is a credit line that’s arranged with your bank along with a set amount. It means you can withdraw funds from your account even if the balance is zero.
With an RCF, you can withdraw money up to your credit limit, and you pay back the outstanding amount plus interest for the funds you’ve drawn down. This allows you to borrow more money again for the duration of the agreement.
Do I have to provide a personal guarantee as security when applying for a revolving credit facility?
Although it’s not the case with every application, you may have to provide a personal guarantee for security. Not only will it prove to your lender that you’re responsible, but it will also make the interest rates more affordable.
What’s an alternative to revolving credit for long-term financing?
If a revolving credit facility isn’t suitable for you, there are other options such as invoice financing, which means you can have an advance on any payments owed to you.
If your business needs funding to make purchases such as vehicles and machinery or to boost its cash flow, you could consider a business loan or asset finance.