Take a look at Funding Bay’s revolving credit facility guide.
What is a revolving credit facility?
A revolving credit facility allows the borrower to access sums of money repeatedly up to a pre-defined limit. At the same time, they make regular monthly repayments of capital and interest on the amount borrowed.
It is sometimes known as operating line or bank line credit. This means that this form of credit facility can be used over and over again, unlike a traditional loan, where all of the funds would be advanced at the start of the term and where the loan agreement terminates once all repayments have been made.
When might this facility be useful for my business?
For business customers, revolving credit is often suitable for those who experience significant fluctuations in their cash flow, such as those whose business is seasonal. It is also useful for anyone who might be hit by unexpectedly large bills. These facilities can be used to fund stock purchases or equipment purchases; to pay regular expenses like salaries and rent when cash flow is stretched, or to improve the business’s working capital.
Normally, you need to be a limited company to apply for this form of credit, and revolving credit facilities designed for businesses are not normally offered to sole traders and the like. The credit provider will continuously review the borrower’s repayment record and may decide to either raise or lower the credit limit.
How much do these arrangements cost?
When commencing a revolving credit facility, it is common for the borrower to pay an initial commitment fee, which might be either a fixed amount or a set percentage of the amount borrowed, such as 2% to 4%. The Annual Percentage Rate on a revolving credit facility might typically be between 7% and 50%. Failing to make the minimum repayment, or borrowing more than the credit limit, is likely to attract a penalty fee.
Are they similar to overdrafts and credit cards?
Further into our revolving credit facility guide, is the difference between overdrafts and credit cards. In some ways, it is similar to an overdraft. However, an overdraft can, of course, only be arranged with the bank with which you have your current account.
However, you can shop around and look at multiple providers when seeking a revolving credit facility. This is a very competitive market, with more than 200 active lenders, so it might be advisable to use a broker that offers deals from a large number of providers.
In some ways, these facilities also share some similarities with credit card borrowing in that the customer decides how much to borrow at any one time, and how much to repay, subject to the pre-defined minimum payment. Also, revolving credit borrowers can reduce their repayments by paying back the sums borrowed as soon as possible, rather than letting the interest build up over time.
Although revolving credit facilities are more flexible than traditional business loans, the interest rates involved are likely to be higher, and the amount you can borrow may be lower. However, the rates are likely to be lower than those on business credit cards.
How much might I be able to borrow?
The maximum limit on a revolving credit facility is likely to be linked to the business’s turnover. Whether they are offered, or how much credit is offered, is also dependent on how long your business has been trading – some facilities require a 12-month trading history before an application can even be considered. Many providers offer a minimum of around £50,000 and a maximum of £10 million under these facilities, while some providers specialise in offering smaller amounts to smaller companies, and here the typical facility might range from £1,000 to £250,000.
Each individual withdrawal of funds from the revolving credit facility might be limited to one month’s turnover. Many industry experts recommend that the size of a business’s revolving credit facility should not exceed 30% of its total available credit.
How long does the facility last?
More in our revolving credit facility guide is the length of the facility. They might be set up with a term as short as a few months. Other arrangements, typically those with larger maximum limits, might have terms of up to 10 years. However, if you take a shorter-term arrangement, such as one with a maximum term of two years, the provider may offer you a new arrangement if you have demonstrated a good repayment record.
What does a provider use to assess an application?
When considering an application, a provider is likely to consider the business’s credit history and to review financial statements such as the balance sheet, income statement, and cash flow statement. Officially, revolving credit facilities do not require any security, but the provider is likely to demand personal guarantees from the business’s directors.
How long does it take to set up revolving credit?
Revolving credit can typically be arranged within a few hours, particularly where the application is made online or via the provider’s app. The simple application process often takes a matter of minutes.
To find out more about a revolving credit facility, get in contact with the team at Funding Bay. We work with a roster of lenders who offer a revolving credit facility, including iwoca, Just Cashflow, FIBR.
Get in contact with our team below to set up a free consultation.
