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Revolving credit facility – The short term funding solution every small business owner should know about

December 21, 2017

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They might not have the catchiest name — but revolving credit facilities are one of the most useful types of business finance available.

Here’s everything you need to know about revolving credit facilities, and how they could help you fund your business.

What is a revolving credit facility?

Imagine an old-fashioned bank overdraft, but without a bank account — that’s essentially what a revolving credit facility is.

You’ll get a pre-agreed credit limit, which is the maximum amount you can have outstanding at any one time, and pay interest on whatever is outstanding.

Usually, you’ll have an online account where you can log in, see the status of your credit facility, and withdraw funds to whatever account you like.

Like an overdraft or credit card, you can manage the balance, perhaps paying back a certain portion and then ‘topping up’ later on with another withdrawal. In fact, some providers of revolving credit facilities offer them with a business credit card included.

Who are they designed for?

Revolving credit facilities are a short-term reserve of cash that you can dip into when you need. They wouldn’t necessarily be my first choice as a long-term source of funding for a specific project, but for cashflow gaps here and there they’re hard to beat.

With this in mind, revolving credit facilities are suitable for a wide range of businesses, and any firm that experiences an occasional need for short-term funding could benefit from having one set up.

Advantages of revolving credit facilities

The key advantage of revolving credit facilities is flexibility. There’s no need to tie yourself into a fixed-term agreement, but you know the money is there if you need it.

Many of the leading providers of revolving credit facilities use automated credit decisions and integrations with accounting software to make credit decisions almost instantly.

This means it’s often possible to set up your facility in a few minutes — which can make all the difference when you’re in a tough spot and need the money quickly.

Another key factor is that aside from any initial setup fees, you pay for what you use — so your facility can sit unused for months, but then be ready to go at a moment’s notice.

Interest rates

The annual interest rates for revolving credit facilities are quite high, but they can end up being cheaper than fixed loans in real terms because you’ll use them for a few months rather than 1–3 years.

The interest rate is only one factor that affects overall cost, and the timeframe and amount are just as important. In other words, if you’re using a revolving credit facility the way it is intended, you’ll usually pay less overall because the term will be that much shorter.

Unlike a fixed-term loan with set repayments, the cost of a revolving credit facility is really in your hands — because the total interest you repay will depend on how much you borrow, and how quickly you pay it back.

Disadvantages of revolving credit facilities

The main downside of revolving credit facilities is that your credit limit may not be as large as you’d like for bigger projects.

The credit limit generally won’t be more than about a month’s revenue, although this will vary from business to business depending on trading history and revenue performance.

Having said that, some of the lenders in this area will agree to credit limits of £100,000 or more — but you’ll only be eligible for an amount that large if your turnover can support it.

Finally, because revolving credit facilities are a form of unsecured lending, you’ll normally have to offer a personal guarantee.

While this shouldn’t be an issue if all goes to plan, it’s important to remember that if things do go wrong you’ll be liable to pay if your business can’t.

For this reason, it’s a good idea to seek professional advice before signing a personal guarantee agreement.

Practical Example: Douglas Younger

One of our recent customers is a great example of how revolving credit facilities work in practice.

business using revolving credit facilityDouglas Younger — owner of Fork Truck Borders Instruction — teaches students how to drive and operate machinery like forklifts, cherry pickers, and cranes. He wanted to buy a new forklift so he could take on another instructor, and decided to use external funding for this purpose rather than risking his day-to-day cashflow.

He went to his bank to borrow a few thousand pounds, which would be enough to buy a good second-hand forklift. Even though he’d banked with them for years and they had direct access to his business bank account, his application was rejected.

Via the Bank Referral Scheme, Douglas found Funding Options, and we introduced him to one of the leading providers of revolving credit facilities.

This was a good fit because Douglas knew he could absorb the cost within a few months, but wanted to see how things went with the new instructor before committing to a set repayment schedule.

With a revolving credit facility in place, Douglas knows he can use the funding line when his cashflow is tight, and pay it off when his customers have paid him — a good solution for a business with unpredictable cashflow.

Could a revolving credit facility help your business?

By now I hope you’ve got a good overview of revolving credit facilities and what they’re suitable for. As one of the more flexible products in alternative finance, they’re useful for a wide range of businesses and situations — and perhaps they’d be a good fit for your firm.

If you’re not sure, Funding Options can help you find the best fit for your business, whatever you need.

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