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: choosing financing based on advertised interest rates rather than usage costs.
The key question is not which has the better rate. It is how you are going to use the money.
This guide compares the two products side by side, walks through a worked example using UK SME numbers, and shows you the dimensions on which the two products differ. The right choice depends on how you plan to draw the money, how long you need it for, and what your cash flow pattern looks like.
At-a-Glance Comparison
| Feature | Revolving credit facility | Term loan |
| How it works | Draw, repay, redraw as needed | Lump sum, structured schedule |
| Interest charged on | Only what you draw | Full amount from day one |
| Interest rate range | 8% to 25% annually | 4% to 18% annually |
| Loan sizes | £25k to £2m | £20k to £25m |
| Arrangement fees | £500 to £2,500 flat | 1% to 3% of loan value |
| Speed to funds | Immediate once set up | New application each time |
| Repayment flexibility | Repay any amount, any time | Early repayment charges typical |
| Best for | Ongoing irregular funding | One-time defined investment |
How a Revolving Credit Facility Works in Practice
A revolving credit facility works like a business overdraft or credit card. You can draw funds, repay them, and redraw them as needed, up to a set credit limit. Interest only applies to what is drawn.
Your lender approves a credit limit, and you access funds as needed. Repay any amount, and your available balance immediately increases by that amount. This creates continuous access without reapplication.
Typical credit limits range from £25,000 to £2 million across our lender network, depending on business turnover and creditworthiness. Interest rates on revolving facilities are typically priced as a margin above the Bank of England base rate, which affects the underlying cost of the facility as rates move.
Real Client Example: Health Personnel
Health Personnel, who provide supported living services, used a revolving facility to manage irregular council payment cycles. Rather than waiting 60 to 90 days for payments while covering immediate staff costs, they draw funds against confirmed contracts and repay when councils settle invoices.
This approach maintains positive cash flow without paying interest on unused credit during periods when payments arrive on schedule. Read the full Health Personnel case study for the facility structure and outcome.
How a Term Loan Works in Practice
A term loan provides a fixed lump sum with a structured repayment schedule. Interest applies to the entire amount from disbursement, regardless of when or how you spend the money.
Our lender network typically offers terms from 1 to 10 years, with amounts ranging from £20,000 to £25 million, depending on business requirements and security offered. The predictable monthly repayments make term loans suited to structured investments where you know the full amount you need upfront.
Real Client Example: Future Fishing
Future Fishing, an independent tackle equipment retailer, secured a term loan for major inventory expansion before peak fishing seasons. They needed the full amount immediately to secure bulk supplier discounts, making the structured repayment approach ideal for their planned investment.
The predictable monthly payments allowed accurate profit margin calculations across their expansion strategy. Read the full Future Fishing case study for the numbers and outcome.
Cost Comparison Using Our Lender Network Data
Based on deals processed through our 200+ lender network, here is the cost reality.
Revolving credit typically ranges:
- Interest rates: 8% to 25% annually
- Arrangement fees: £500 to £2,500
- Interest charged only on drawn amounts
Term loan typical ranges:
- Interest rates: 4% to 18% annually
- Arrangement fees: 1% to 3% of loan value
- Interest charged on the full amount from day one
Critical insight: a business using 50% of its revolving facility on average often pays less total interest than the equivalent term loan amount, despite the higher advertised rate.
The British Business Bank publishes commentary on UK SME lending patterns that supports this. Average UK SME facility utilisation is below 100%, which is why headline rate comparisons frequently mislead.
Worked Example: Same Business, Different Structures
To make the cost comparison concrete, consider a UK wholesale distributor that needs £250,000 of working capital funding to bridge seasonal stock purchases and customer payment timing over a 24-month period.
Option A: Revolving credit facility of £250,000.
- Interest rate: 12% APR on drawn balance
- Arrangement fee: £2,000
- Usage pattern: draw £250,000 initially, repay £150,000 across the first 12 months as customer payments arrive, redraw £100,000 for the next stock cycle, then repay everything over the following 12 months
- Average drawn balance across 24 months: approximately £160,000
- Total interest at 12% on the average balance: approximately £38,400
- Total cost of borrowing: £40,400
Option B: Term loan of £250,000.
- Interest rate: 8% APR on the full balance
- Arrangement fee: £5,000 (2% of loan value)
- Term: 24 months
- Fixed monthly repayments: approximately £11,318
- Total interest across 24 months at 8% APR: approximately £21,600
- Total cost of borrowing: £26,600
In this scenario, the term loan is cheaper by approximately £13,800 despite the revolving facility’s use-only-what-you-draw structure.
But the scenario changes if the business only needs 40% of the facility on average, or draws the facility down for only 12 of the 24 months. The break-even between the two products is around 65% average utilisation. Below that, the revolving facility becomes cheaper. Above it, the term loan wins on cost.
The point: the answer depends on how the money is used. This is why “which has the better rate” is the wrong question. The right question is “which structure matches my cash flow pattern?”
Security and Personal Guarantee Requirements
Both products typically require some form of security or personal guarantee, but the pattern differs.
Revolving credit facilities up to approximately £250,000 are often available on an unsecured basis, backed by a personal guarantee from the directors. Above this threshold, lenders typically require additional security, most commonly a debenture over the business’s assets or a charge over receivables. The personal guarantee remains standard across UK SME lending.
Term loans of larger amounts (typically above £100,000) usually require security proportional to the loan size. This could be a debenture, a charge over property, or asset security. Personal guarantees are also standard. The higher security requirement reflects that the lender is committing the full loan amount from day one, rather than a facility that may or may not be drawn.
For a business without significant assets or property to offer as security, a revolving credit facility is often easier to secure than a term loan of the same size.
Speed to Funds
Once a revolving credit facility is established, drawing from it takes minutes or hours rather than days. The funds are already committed. A single request via the lender’s online portal or a phone call to the relationship manager releases the money. For businesses managing irregular cash flow demands, this speed is often the decisive advantage over a term loan.
A term loan releases funds once, on the drawdown date agreed at the start. Any subsequent funding need requires a fresh application, fresh credit assessment, and fresh documentation. The timeline from application to funds is typically 2 to 8 weeks, depending on the loan size and complexity.
For a business managing unpredictable working capital demands, or a business that has just experienced an unforeseen expense, the revolving facility’s speed advantage is often decisive.
What Happens if You Need More
Revolving credit facilities are typically reviewed annually. If your business has grown and the utilisation of the facility has been healthy, the annual review is the natural opportunity to increase the limit. This process is significantly faster and cheaper than applying for a new facility and does not require full re-underwriting in most cases.
Term loans, once agreed, are fixed at the drawdown amount. Additional borrowing requires a new application. The new loan sits alongside the existing one, complicating the balance sheet, or replaces it (a top-up), which triggers a full re-underwriting and typically new arrangement fees.
For businesses in a growth phase, this distinction affects the total cost of borrowing across a growth cycle. A revolving facility that scales with the business through annual reviews is cheaper than three consecutive term loans as the business’s borrowing needs grow.
Impact on the Balance Sheet and Future Lender Assessments
Both product types appear on the balance sheet as debt, but the accounting treatment and lender perception differ subtly.
A revolving credit facility appears in the current liabilities section of the balance sheet at the drawn amount, as reported at the point of the financial statements. If the facility is undrawn or partially drawn at year-end, the balance sheet shows only the drawn portion. This can flatter the debt-to-equity ratio compared to the same headline facility as a term loan.
A term loan appears at the full outstanding balance from drawdown, split between current liabilities (the portion repayable within 12 months) and long-term liabilities (the balance beyond 12 months). The full outstanding balance is visible on the balance sheet regardless of the intended use.
Companies House filings make these differences visible to any future lender, investor, or acquirer running due diligence on the business. The distinction rarely determines a facility decision on its own, but it does affect the presentation of the financial position. For a business planning a future capital raise or acquisition, this is worth considering when choosing between the two structures. Our guide on how alternative lenders assess your application explains what lenders look at when reviewing a business’s finances.
Repayment Flexibility
Revolving credit facilities allow you to repay any amount, at any time, without penalty. This is what makes them cash flow friendly. A business with a good month can pay down the facility significantly, reducing interest charges immediately. A business with a tight month simply pays interest on the drawn balance.
Term loans typically include early repayment charges (ERCs) if you want to pay off more than the scheduled monthly instalment or repay the loan in full ahead of the agreed term. These charges can be 1% to 5% of the outstanding balance, depending on the lender and how much time remains on the loan. For a business that anticipates being able to repay early, ERCs can significantly affect the true cost.
Decision Framework: Which Product Suits Which Situation
From analysing thousands of successful funding applications through our lender network, clear patterns emerge.
Revolving credit works best for:
- Service businesses with irregular payment cycles (like Health Personnel)
- Seasonal operations requiring flexible funding timing
- Businesses managing cash flow problems with unpredictable gaps
- Growing businesses that will need larger limits in future
- Businesses that value speed of access above the lowest headline rate
Term loans suit:
- Asset acquisition requiring immediate full payment (like Future Fishing)
- Business expansion with a defined investment amount
- Structured growth, where the full amount is needed for the full term
- Businesses with security available to unlock lower rates
- Businesses that value repayment predictability above flexibility
Some businesses use both, holding a revolving facility for working capital timing while running a term loan for an asset purchase or expansion project. The right combination depends on your pattern.
Advanced Considerations
Interest Calculation Timing
Most business owners do not realise the interest calculation timing differs significantly between the two products.
Revolving credit. Daily interest calculations on outstanding balances mean repaying £10,000 on day 15 saves you interest for the remaining month.
Term loans. Monthly interest calculations mean the timing of repayments within the month makes minimal difference.
Facility Reviews and Renewals
Revolving credit. Annual reviews can adjust limits based on business growth, potentially increasing available funding without new applications.
Term loans. Fixed terms require completely new applications for additional funding needs.
Regulatory Framework
All commercial finance brokers operating in the UK, including Funding Bay, are authorised and regulated by the Financial Conduct Authority. The FCA authorisation gives you access to formal complaints and redress processes if the broker recommendation turns out to be unsuitable for your circumstances. Working with an FCA-authorised broker is safer than direct-to-lender applications where these protections do not apply in the same way.
How to Compare Your Options
The best way to compare a revolving credit facility and a term loan for your business is to model both against your cash flow.
Our team can walk through your last twelve months of receivables and outflows, model both facilities against your usage pattern, and tell you which structure will cost less over the life of the borrowing. We work across our 200+ UK lender network to compare rates across multiple providers for both product types, including specialist lenders focused on industries or business circumstances.
The conversation is free, uses a soft credit search that does not affect your file, and typically produces an indicative comparison within 48 to 72 hours.
Try our business loan calculator to see indicative monthly repayments across different loan sizes and terms, or speak to a broker if you want to discuss which structure fits your business.
