Revolving Credit Facility

If you’re looking for quick cash without having to go through the loan application process, revolving credit could be the financial solution you’ve been looking for.

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If you’re a UK business owner looking to seek out alternative loan options, revolving credit could be the financial solution for you. Revolving credit means you can withdraw money as and when you require it. Read on to learn more about a revolving credit facility (RCF), how it works, the pros and cons, and whether your business qualifies.

What is a revolving credit facility? How does revolving credit work? The pros and cons of revolving credit facility What can you use revolving credit for? Does my business qualify? Will revolving credit negatively affect my credit score?

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What is a revolving credit facility?

A revolving credit facility is much like an overdraft in that your business can withdraw money when it sees fit to cover all kinds of business needs - from wages to replenishing stock. With banks now hesitant to offer overdrafts to businesses, revolving credit is a popular alternative.

Revolving credit is a working capital finance option suitable for small and medium businesses who might struggle with cash flow - whether that’s due to business seasonality or unpredictable cash needs.

How does revolving credit work?

Much like an overdraft, revolving credit facilities are not static business loans. Your business will have pre-agreed a funding limit with the lender, and you can go about withdrawing the funds and repaying it and withdrawing again - just like an overdraft.

Funds replenish as you make repayments, which is where the ‘revolving’ term comes from.

How much you can access is determined by a few factors, including your business’s credit history and the strength of your business. But the amount you’re able to access is usually the equivalent of one month’s revenue.

The finance can be used to pay one large fee, or you can use it to pay a series of smaller payments - it’s yours to do with what you please. You might want to use it to fill a monetary gap and never use it again - you can use it how you see fit with your business.

If you’re wondering whether to look into a revolving credit facility or apply for a business loan - one difference between the two is that the interest is fixed on revolving credit - you only pay as you use it. Interest is usually charged daily when using revolving credit - and the interest fee depends on how much spending on that given day.

How a revolving credit facility (RCF) works

Here’s an example:

ABC Company Ltd has a revolving credit facility with an agreed credit limit of £10,000. They only withdraw £4,000 of this to purchase stock. They start to repay the amount that they've used, including any interest, over a few months. After the amount is paid off in full, ABC Company Ltd can access up to the full credit limit of £10,000 again. Remember, you don't have to use the full credit amount, and you only pay interest on the amount that you use!

Capalona is highly-experienced in helping businesses just like yours secure the finance they need to sustain growth. Apply today to find out more about our revolving credit product.

The pros of revolving credit facility

There are many benefits of UK revolving credit, that’s why it’s a popular option for many businesses. You can read about some pros of revolving credit below.

Flexibility - It’s a flexible type of business funding. You aren’t tied into a long-term commitment - withdraw money when you need it and repay - continue the cycle until you no longer require the finance.

Grows with you - If you are a model customer, withdrawing and repaying the money promptly, there’s a strong chance your lender can increase your spending limit. This means that a revolving credit facility can grow with your business.

Fast funding - If you require fast funding, some lenders enable you to withdraw money on the day of your application. This is a much quicker financing alternative to a business loan - which can take longer to complete.

Pay interest only when you use it - The interest rate is fixed - and you only pay the interest when you’re using the facility. If you’re not using it, then there’s no interest to pay. It’s a financing option that is easily controlled by you.

No early repayment fees - There are no charges for early repayment - so you can pay back as quickly as you like.

You don’t need to sign new agreements - Every time you need to dip back into the overdraft-style finance, you don’t need to sign a new agreement as you would when applying for a new loan.

You reduce cash flow issues - Paying invoices on time, being able to quickly replenish stock levels, being able to pay wages on time and being able to sleep without money worries are all significant benefits to a revolving credit facility.

The cons of revolving credit facility

At Capalona, we like to ensure you have a balanced picture of all the funding options available to your business. That’s why we’re sharing some cons of revolving credit, as well as the pros! This means you can weigh up whether a revolving credit facility is a financing option your UK business should consider.

Personal guarantee (PG) may be required - You might be asked to provide a personal guarantee to secure the finance.

High-interest rates - Interest rates are typically higher on a revolving credit facility than interest rates on an average business loan.

Short-term financing - If you’re looking for funding long term, this might not be the funding solution for you. Revolving credit is usually offered over a year or two.

Knowledge: If you’d like more information about a personal guarantee including what it is, how it works and whether you should consider providing one should your lender request one - read our guide What is a personal guarantee - and do you need one?

What can you use revolving credit for?

Whether you require quick cash to pay for an unforeseen expense or you want to make a series of smaller purchases - a revolving line of credit could be the best funding option for you.

Many businesses will use their revolving credit to pay salaries - particularly if there is a seasonality to your company, and you need to plug that gap until business picks up. Many companies use revolving credit to top up stock levels - bulk buying stock can mean better discounts for your business. You might have a large order on the horizon and making good on the delivery might mean you require more stock or additional employees to get the job done.

Revolving credit can help you solve many cash flow issues short-term and is the perfect option for your business if you don’t want to go through a sometimes arduous loan process.

  • Bridging short-term cash flow issues
  • Investing in stock and equipment
  • Operating expenses such as payroll
  • And much more!

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Does my business qualify?

It’s important to note that lenders’ criteria do vary. When checking your suitability for a revolving credit facility, lenders will look into your financial performance - including your credit history and the value of your assets.

You can mitigate the risk for lenders by signing a personal guarantee. We do suggest seeking professional advice before considering signing a personal guarantee. A personal guarantee is a signal to the lender that you wholeheartedly believe in your business, so much so you’re willing to become the secondary payer if the company fails to make repayments.

Pros of a personal guarantee

  • Chance to expand your business
  • A good option for new businesses
  • Decreases risk and increases security for the lender

Cons of a personal guarantee

  • Personal repercussions - you could lose your house, your car and other personal assets
  • If you fail to cover the repayments - you could be made bankrupt
  • If you can’t pay the funds back, you will have to seek court permission to become a company director in the future

Will revolving credit negatively affect my credit score?

Just as with any line of credit, if you don’t keep up repayments, this can negatively impact your business’s credit score. There are many ways you can ensure a revolving credit facility does not lead to bad credit with these tips below:

Don’t make multiple applications for revolving credit - Too many applications for credit does not put you in a good light for lenders. Before you apply, it’s essential first to understand anything in your application that could be a red flag to lenders.

Pay off balances each month - Just like a credit card - you should pay your balances off each month to keep on top of your borrowing. Paying off balances each month shows lenders you are responsible - this can help you unlock high credit limits in the future which can support your business’s growth.

If possible, try and keep your balances low - If you need the money, then, by all means, spend it - but if you’re able to keep them low, this will show lenders that you won’t max out your limit in one go. Again, placing you in a favourable light with the lender.

Is a revolving credit facility the best financing option for you? Apply today to get your no-obligation quote. Alternatively, you can read about all other funding solutions.

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