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Revolving Credit Facilities

What Is A Revolving Credit Facility?

Revolving credit facilities are a type of Working Capital finance.

As with overdrafts, you can access pre-approved funds as required, and interest is usually charged on the amount withdrawn white it is outstanding.

Revolving Credit Facilities are a good alternative to overdrafts, which used to be common with the high street banks but are much hard to find these days and much more expensive.

 

What Is Working Capital?

Working Capital is the amount of cash a business can safely spend. It’s commonly defined as current assets minus current liabilities. Usually, Working Capital is calculated based on cash, assets that can quickly be converted to cash (such as invoices from debtors) and expenses that will be due within a year.

For example, if a business has £5,000 in the bank, a customer that owes them £4,000, an invoice from a supplier payable for £2,000, and a VAT bill worth £4,000 its Working Capital would be £3,000 (5,000 + 4,000) – (2,000 + 4,000)

How Revolving Credit Facility Works

Revolving Credit Facilities get their name from the fact that they’re not fixed Business Loans but rather a rolling agreement.

The terms vary, but usually you’ll have payment terms that specify how long after drawing funds you need to make repayments, and you’ll also have a credit limit in the same way you would for a bank overdraft.

Usually once you’ve repaid a certain amount of money, you can withdraw more, hence the term revolving. The best way to think about Revolving Credit Facilities is that they’re effectively a type of loan that can be automatically renewed.

Revolving Capital Facility Eligibility Criteria

Lenders will offer a maximum facility size based on the financial strength of the business and any security offered. Typically the only security required will be a directors personal guarantee.

In some cases, there is a commitment fee taken upfront for ‘right to access’ the facility, plus the standard ongoing monthly interest charged on the funds drawn down at any one time. This is subject to the lender used as each criteria used may differ.

The amount a lender will look to offer is typically calculated as one months revenue, however in case of strong businesses or repeat customers they may offer a top-up or an increase in the limit.

Revolving Capital Facility Benefits

  1. Flexibility – A great advantage of a revolving credit facility is flexibility, as they can be very useful for growing businesses that need to occasionally dip into an overdraft-style pot of funds. Although they generally come with a higher interest rate than a typical loan, however used correctly they can be cheaper in real terms. Revolving credit facilities are best used to cover specific cash flow gaps for a week or two, resulting in you only paying interest for a matter of days, rather than months or years as you would with a Business Loan – meaning you only pay for what you use.
  2. Quick process & set up – One of the things business owners most appreciate about revolving credit facilities is how fast they can be set up. Automated credit decisions and integration with accounting software means that for some sectors, credit decisions are instant. With some lenders, it’s even possible to draw funds on the same day as the application. With a credit line in place quickly, you know you’ll be able to cover short-term costs if opportunities or unexpected bills crop up.
  3. No need for new agreements – Another difference between credit lines and loans is that revolving credit lines don’t have to be set up under new agreements each time you use them. This can be really handy for companies that need to borrow small amounts regularly, rather than a larger amount for a specific project.
  4. No security required – Another benefit of credit lines is that they don’t require security or asset valuations, your business will go through one application process, and once the facility is set up, you can use it until the agreement is updated or changed.
  5. Facility can be used alongside other funding – The revolving credit facility can be used for more general business cash flow management, however Saffron Financial have a fantastic panel of lenders offering a variety of financial solutions, therefore if this facility would be beneficial to you alongside another finance product available this wouldn’t be a problem.