Simply speaking, a drawdown facility is a type of business loan. However, instead of receiving the loan amount as a single lump sum at the start of the agreement, it allows you to borrow differing amounts at different times throughout the term of the agreement. This means that it’s effectively a form of ‘revolving credit’ arrangement.
A drawdown agreement might typically have a term of 12 or 24 months. After making a withdrawal, you might then repay the amount borrowed, plus interest, over several months. The daily interest rate might be somewhere between 0.05% and 0.1%. Then, when you’ve repaid the original borrowing, you might start thinking about whether you need to access any more funds.
It’s very flexible
The flexibility of drawdown arrangements is perhaps their most attractive feature. In a nutshell, you borrow what you need, when you need it. For example, if your drawdown facility has a limit of £5,000, you might borrow £1,000 initially, but you can still return and borrow a further £2,000 three months later, or £3,000 six months later – indeed you can access any amount up to your drawdown limit, all without needing to arrange a new credit facility.
However, if you decide you don’t need to borrow any additional amounts, then that’s fine. These arrangements are totally flexible, so if you only need to access your drawdown facility once or twice, then that’s no problem.
Only borrow when you need it
A business’s needs change over time. No one likes being in more debt than strictly necessary, so you can simply borrow the amount you need at any one time, and no more.
Reduce interest payments
As you only borrow what you need, this means that you won’t be making unnecessary interest repayments. It also means that, while the headline interest rate on your drawdown arrangement is almost certain to be higher than for a traditional term business loan, you might still end up repaying less interest overall.
Fixed interest payments
Interest rates for drawdown are usually fixed. This allows for easy budgeting, as you won’t suddenly be hit with an unexpectedly high repayment demand.
Overdrafts are becoming harder to obtain
In some ways, a drawdown facility works in a similar way to an overdraft, indeed an overdraft is another form of revolving credit. However, with banks becoming increasingly reluctant to grant overdrafts to smaller businesses, many businesses have started looking to drawdown facilities from specialist providers instead.
Use the funds for almost any purpose
Businesses might use the funds from a drawdown for many different things, such as:
Improving general cash flow
Paying salaries or other essential expenses in the short-term, while the business recovers from a difficult period
Paying unexpected bills or meeting the costs associated with business emergencies
Purchasing stock
Funding business expansion or development of new products and services
Fast approval
Drawdowns can be approved by the finance provider very swiftly – certainly faster than for many other types of business loans. Indeed, if you are lucky, the approval process will only take a matter of hours, and you can then draw down the funds immediately.
The application process is usually conducted online, and the lender is likely to use an automated decision-making process.
Available to a wide range of businesses
It’s usually possible to get approval for drawdown even if you have only been trading for a few months, or if you have a poor credit record.
No security required
Although some of the directors might be asked to provide a personal guarantee – especially if your business is relatively new or has impaired credit – you won’t need to provide any business assets as security.
Secured drawdown facilities do exist, however, but if you aren’t willing to provide any security, then don’t worry, you should still be able to access this form of finance.
You might get a top-up
While your initial drawdown limit might be restricted to around one month’s revenue, if you demonstrate a good repayment record, and are a repeat customer, your lender might agree to increase your limit. This hopefully means that your drawdown arrangement can grow in line with your business.
Get in touch with the team at FundingBay to find out what is the best facility for your business!
