Why is a revolving credit facility suitable for restaurants?
If you’re in the restaurant trade, you know all too well how it can be an unpredictable business. You might experience a period of reduced footfall, whether this is due to seasonal variations, increased competition, or any other reason. However, in spite of your reduced revenue, you still have to pay salaries, utility bills, rent, and other expenses.
You might also want to access finance quickly to fund:
- Refurbishments
- Recruitment and staff training – the restaurant trade is known for having a high staff turnover
- Development of new menus, which might allow you to stay ahead of your competitors
A revolving credit facility allows you to borrow the funds you require, at short notice and could be the solution to your cash flow worries, or allow you to proceed with a major project, such as a refurbishment. It’s a very flexible form of borrowing and you can use the money for any business purpose.
How does a revolving credit facility work?
Your revolving credit facility will have a pre-defined credit limit. For many smaller businesses, a limit of just a few thousand pounds might be sufficient, but some of the biggest names in the hospitality sector have been able to obtain credit limits of £200 million or more. Many lenders restrict the limit they will offer you to 10% of your annual turnover.
The term of a revolving credit facility might be somewhere between six months and two years.
One of the principal advantages of a revolving credit facility is that you only pay interest on what you have borrowed. For example, if you have a facility with a limit of £10,000, but decide you only need to access £5,000, then you would only pay interest on the £5,000. This contrasts with the situation where you take out a traditional business loan for £10,000, as in this case, you would pay interest on the full amount.
You can also return to a revolving credit facility as often as you like, during the term of the agreement. Say that you initially draw down £10,000, then you later clear this balance and pay the interest. You would then be able to borrow an additional amount under the revolving credit agreement, without needing to make a new application. In contrast, if you take out a standard term loan, then you simply receive a one-off cash advance at the start of the term and can’t then access any more funds.
When you compare providers of revolving credit facilities, you might be quoted a daily interest rate. Typically, this could be between 0.05% and 0.1%, although a lower interest rate might be offered if you opt for a secured facility, where a business asset is offered as security. You are also likely to be asked to pay an arrangement fee, which might be somewhere between 2% and 4% of the credit limit.
A revolving credit facility might also be known as an operating line, a bank line, or simply as a revolver.
Always try to pay off the balance on your revolving credit facility as soon as possible, just as you might with your credit card.
Is a revolving credit facility right for me?
In addition to the ability to borrow from a revolving credit facility on multiple occasions, other advantages of this type of finance include:
- It can be easier to obtain than a bank overdraft or a business loan, especially with the high street banks becoming increasingly reluctant to lend to restaurant businesses
- There’s no long-term commitment – as soon as you no longer need to borrow, you simply stop using the facility
- You might be able to make your first withdrawal very soon after your application is approved – possibly even on the same day with some lenders. With many providers, the application process also takes a matter of minutes, and the lender might make a decision on your application within hours
- There are unlikely to be any early repayment charges
However, a revolving credit facility also has its potential disadvantages:
- Interest rates are typically higher than for business loans, even if they might be a little lower than rates offered on credit cards
- The lender may ask one or more directors or shareholders to provide a personal guarantee as security for the borrowing, especially if you have an impaired credit profile
- It might not be suitable for long-term borrowing
- Failing to make repayments on time can damage your credit rating
If you don’t think that you are suited to a Revolving Credit Facility, then you might want to get in touch with Funding Bay to find out more about the other loan products that we offer.
Here at Funding Bay, we have access to a number of providers of revolving credit facilities. Get in touch with Funding Bay to find out what we can offer.
