Why might a small business want or need a revolving credit facility?
Being able to access the right type of credit at the right time is vital for many small businesses. The traditional debt solution has often been the fixed-term business loan, where a single amount is borrowed at the start of the loan term and is then repaid in monthly installments.
However, many businesses prefer to have a revolving credit facility, where they can borrow as many times as they like, as long as the total debt doesn’t exceed a pre-defined maximum amount. You can then make flexible repayments dependent on your trading circumstances, subject to a set minimum payment each month.
In this respect, a revolving credit facility is similar to an overdraft or credit card. However, revolving credit arrangements can be set up with any provider, whereas you can only get an overdraft from the bank with which you have an account. These facilities often also have lower interest rates than credit cards.
What might a revolving credit facility be used for?
A business might use its revolving credit facility for one large purchase or for several smaller commitments. Examples might include:
- Funding expansion, such as developing new products and services, or recruiting and training new staff
- Short-term cash flow management
- Purchasing stock or equipment – borrowing to fund these purchases might allow you to benefit from bulk buy discounts
- Paying emergency or unexpected bills, such as repairs and medical bills
- Accessing additional credit over and above that available through traditional business loans, or Government-backed schemes such as the Bounce Back Loan
Many businesses, however, have found accessing traditional business loans and Bounce Back Loans difficult, and in these cases, being able to access a revolving credit facility has been invaluable.
Many businesses use revolving credit to meet short-term cash flow management issues and may even use the amount borrowed to pay salaries, rent, utilities, and other regular costs. While there might be a reason to be concerned if a business had to use credit to pay these bills over the longer term, there are several legitimate reasons why it might be necessary to do so in the shorter term. For example, the business might be of a seasonal nature, such as one based in a holiday resort, where significantly higher revenues are received at some points in the year.
How much might I be able to borrow, and at what cost?
As a smaller business, your revolving credit facility might typically have a maximum borrowing limit between £1,000 and £250,000 and a term of up to two or three years. The Annual Percentage Rate might be between 10% and 50% although, in practice, interest is usually applied on a daily basis.
If you borrowed £10,000 over 12 months, with an APR of 49% and an annual interest rate of 40%, you would repay £12,294 in total.
Larger and longer facilities are usually only offered to large businesses. However, many providers allow the borrowing limit to grow with your business, so if you demonstrate a good repayment record then you might be able to get your borrowing limit increased.
Other factors to consider
Most revolving credit arrangements for smaller businesses don’t have early repayment fees, although this is something else you should check before you choose your lender. There is likely to be an initial arrangement fee payable at the start of the arrangement, and here you can shop around for the best fee, in much the same way you might seek out providers offering competitive interest rates.
One of the biggest advantages of a revolving credit facility is its flexibility – you only borrow what you need, and you only need to make interest repayments when you are using the facility.
Whether your application is approved might depend on:
- How long you have been trading for – some providers won’t consider anyone who has been in business for less than one year
- Your turnover
- Your business credit history
- The financial strength of your business – the prospective provider will certainly want to see your balance sheet, your income statement and your cash flow statement
- Whether any of the directors of the business can provide a personal guarantee
To find out more about how a revolving credit facility can help your business, get in contact with the team at Funding Bay, and we can give you a free consultation. We work with a roster of lenders who offer a revolving credit facility including iwoca, Just Cashflow, FIBR .
