What is the difference between a revolving credit facility and a term loan?
Through our experience helping over 1,000 UK SMEs secure funding via our network of 200+ lenders, we see businesses make the same costly mistake repeatedly:
Types of Business Loans
Unsecured Business Loans
Unsecured business loans allow businesses to borrow money without offering collateral. In contrast to a secured loan, there are no specific assets offered as security in case of default. Interest rates tend to be slightly higher for unsecured vs secured as an exchange for the higher risk taken on by the lender. Traditional banks and new fintech lenders both offer unsecured loans, typically over 1-6 year terms.
Revolving Credit Facility
Revolving credit facilities (RCFs) are flexible funding solutions that work like a business overdraft. Your business will be set up with a pre-agreed funding limit with a lender over a set duration. During this time, you can draw down and repay the funds you need within this limit, only paying for what you have drawn. This process can be repeated throughout the agreed loan duration, hence ‘revolving’. The security required depends on the lender. Some RCFs can be secured against the debtor book. Some simply require a personal guarantee with no charge over the business.
Growth Guarantee Scheme
The Growth Guarantee Scheme (GGS) is government-backed lending that helps SMEs access funding otherwise unavailable. Your business can borrow between £25,001 and £2 million over terms up to 6 years, with the government providing a 70% guarantee to lenders against outstanding balances. This backing enables lenders to offer competitive rates and approve applications they might normally decline, while maintaining commercial standards. The scheme covers term loans, overdrafts, asset finance, and invoice finance for growth capital.
Development Finance
Development finance is a funding option used to build, convert or refurbish residential or commercial property. It is often used to pay for the purchase and construction costs of a project.
Secured Business Loans
Secured business loans are a way for companies to secure funding by using assets as security. Since lenders typically use high-value assets such as property to secure loans, it means they can lend more in comparison to unsecured business loans. Because the lenders are using assets to secure the loan, often they won’t need to scrutinize personal or business credit as vigorously as they might for an unsecured loan. Further, given the lending is collateralized, the pricing is likely to be lower if the business is able to put up tangible security.
Merchant Cash Advance
A merchant cash advance (MCA) is a type of unsecured, short-term business finance. It is an innovative loan product that uses your card terminal and its’ receipts to secure lending. It has proven popular with certain sectors such as retail, restaurants, and general leisure. It is designed to help businesses gain access to their cash in a flexible way as repayments are taken as a proportion of revenue. Any businesses that use a credit card terminal will benefit from a merchant cash advance, which also tend to be easier to obtain than other forms of business financing.
