What is a revolving credit facility?

Many businesses need extra funds from time to time, whether for new equipment, covering unexpected bills, or bridging cash flow gaps during slower months. But large loans or long-term credit agreements can sometimes feel like too much of a commitment.

If this sounds familiar, a revolving credit facility could be the answer. In this guide, we’ll break down how it works, along with the pros and cons, to help you figure out if it’s the right fit for your business.

Key takeaways

• Access funds as needed: Borrow, repay, and borrow again. This is a flexible option for short-term cash flow management

• Pay for what you borrow: You are charged interest only on the amount you borrow, not the entire credit limit

• Flexible repayment options: Repayment terms depend on your business’s agreement with the lender and can include daily, weekly or monthly repayment options 

What is a revolving credit facility?

A revolving credit facility works like a blend of a business credit card and an overdraft. With this option, a lender sets a credit limit for your business spending. Instead of using a physical card, the lender transfers the funds directly into your business or personal bank account. Interest is charged on the amount you borrow, just like with any credit facility.

You’ll need to pay back what you owe before you can access the funds again. Once the balance is cleared, you can reuse the credit without having to reapply. Repayments are typically required on a regular schedule, whether daily, weekly, or monthly, and the specifics will be outlined in the credit agreement, which can vary by lender.

How does a revolving credit facility work?

A revolving credit facility lets you borrow money flexibly up to a pre-approved limit. Here’s how it works in five steps:

1. Approval and limit: The lender sets a credit limit based on your business’s financial health, needs and credit score.

2. Access to funds: Withdraw funds as needed, depositing them directly into your bank account.

3. Repayment: Repay the borrowed funds on a regular schedule — daily, weekly or monthly — as agreed with the lender. 

4. Interest and fees: Interest applies only to what you borrow, not the overall limit. Additional fees, such as setup or maintenance fees, may apply.

5. Revolving nature: Once repaid, the credit becomes available again without the need to reapply.

Revolving credit example

For example, let’s say a business has a £25,000 revolving credit facility and needs £10,000 to purchase extra stock for an upcoming busy month. The business withdraws £10,000 from the facility, which is transferred directly into its bank account. Interest is only charged on the £10,000 borrowed.

While the remaining £15,000 may still be available, some lenders require that the borrowed amount be paid back in full before allowing additional withdrawals. Once the £10,000, plus interest, is repaid, the full £25,000 becomes available again without needing to reapply.

Can my business benefit from revolving credit?

Revolving credit can be a valuable financial tool for businesses needing short-term, flexible funding without the long-term commitment of a traditional business loan. While it can benefit many businesses, some may find it more useful than others.

Here are a few common examples:

Seasonal businesses: Retailers, tourism companies, and businesses that operate during specific seasons (e.g., summer or winter) often face fluctuating demand. Revolving credit can help cover expenses during slower months or can finance extra inventory and staffing during peak periods.

Startups: Early-stage businesses with irregular cash flow can use it to bridge gaps while waiting for invoice payments or investment.

Freelancers: Those offering freelance services to others may use this facility to cover expenses until the client pays their invoice.

Manufacturers: Manufacturers may use it to purchase raw materials or manage production costs ahead of customer payments.

Revolving credit facility – the pros and cons

It’s important to weigh up the pros and cons of any finance arrangement before applying. Doing so saves time in the long run and ensures it's the right product for your business.

Pros

• Flexible access: Access funds as needed and have peace of mind knowing you have money available

• Pay for what you use: You only pay interest on the amount you borrow, not the overall credit limit 

• No assets required: Unlike a secured loan or asset finance, a revolving credit facility doesn’t usually require you to put up any business assets as security

• Quick application: With the right documentation — such as bank statements, tax returns, balance sheets and your business plan — applying is quick and easy 

Cons

• Higher interest rates: Interest rates are typically higher than other borrowing options 

• Short-term solution: Revolving credit is best for short-term use – if you need more time to settle the debt, consider alternatives such as a business loan or asset finance 

• Fees: Many lenders charge setup fees, and late repayment fees can be costly. Make sure you're aware of all the charges and the impact they may have on your cash flow. 

• Personal guarantee: You may need to provide a personal guarantee, which means accepting personally liability for repaying the debt if your business fails to keep up with its obligations. 

Alternative funding options

If you need to borrow money over a longer period or find high interest rates off-putting, there are plenty of alternative funding sources available for small businesses. Here are a few examples:

Business loan

A business loan is useful if you want to repay funds over a long period. Interest rates can be lower, but the longer the repayment term, the more you may pay overall. The loan can be secured (requires assets like stock or equipment as collateral) or unsecured (no collateral needed).

Overdraft

A business overdraft allows you to withdraw more money than you have in your bank account, up to an agreed limit. You pay interest on the amount borrowed, and the bank may charge fees for exceeding the approved limit. Overdrafts are for short-term cash flow management.

Merchant cash advance

With a merchant cash advance, a lender provides you with a lump sum in exchange for a percentage of future sales or daily credit card transactions. Repayments are automatically deducted based on sales, meaning payments may fluctuate with revenue. Businesses with strong daily credit card sales often use merchant cash advances. 

Cash flow loan

A lender approves a cash flow loan based on your company’s projected revenue and cash flow, rather than physical assets. Lenders assess your business's ability to generate consistent income to determine the loan amount and repayment terms.

Invoice finance

Invoice finance allows you to borrow money against unpaid invoices. The lender advances a percentage of the invoice value, and you repay the loan once the customer pays their invoice. This helps manage cash flow while waiting for payments.

Business line of credit 

A business line of credit is a flexible financing option that allows you to borrow up to a set limit, withdraw funds as needed, and pay it back over time. The lender charges interest only on the amount borrowed, not the overall limit. Unlike a revolving credit facility, a business line of credit may offer more long-term flexibility in repayment schedules.