A Revolving Credit Facility, also known as an RCF, is a form of flexible borrowing similar to an overdraft. A business will have a pre-agreed funding limit with a lender and can draw down a proportion of the available funds to use as and when is needed, with repayments being made as per the agreement. Funds replenish as repayments are made allowing the business draw down again, hence the term ‘revolving’.
RCFs are a popular choice for helping businesses manage cash-flow, but can be used for any number of purposes. One key benefit of an RCF is that you don’t have to draw-down the full amount, and you only pay interest on the amount that you use.
How does a Revolving Credit Facility work?
Let’s say John Smith Limited arrange an RCF with an agreed credit limit of £25,000, and withdraw £10,000 to purchase some new equipment. They begin to repay back the £10,000 including interest, over the next few months. After the full amount is paid back, John Smith Ltd can access then access the full £25,000 again, and start same process over. In most circumstances if the original amount drawn-down is less than the facility limit, the business can draw-down more, up to the facility limit, before the original amount is paid back in full.
The full details of the facility features will be outlined in the agreement terms and conditions.
What situations are they best suited to?
Revolving credit is a form of working capital loan suitable for providing a solution to help short-term cash flow. However, an RCF can also be used for a number of other reasons, such as purchasing stock, recruitment costs or to help with seasonal fluctuations.
How long does an RCF last?
RCFs are designed for short-term use and typically have terms between 6 – 18 months, however lenders may offer to renew the RCF at the end of the term enabling the business to continue using it.
What are the pros and cons?
There are a number of benefits with revolving credit which is why it’s a popular option for many UK businesses. Some of the advantages include:
- Flexibility – Revolving credit a flexible type of business funding. You can withdraw funds as and when is needed, and you aren’t tied into a long-term commitment. Once the funds have been repaid, you can withdraw again until you no longer need finance.
- Fast – Setting up an RCF is typically very quick, some lenders will enable you to make your first draw-down on the same day as your acceptance. This makes it a much quicker alternative to other types of business finance.
- Grows with the business – If a business uses their RCF responsibility and makes repayments on time continuously, lenders will frequently offer to increase the available limit. This means the facility can grow alongside your business.
- Only pay interest on what you use – A business will only ever pay interest on the exact amount they use not and on the full limit. It’s an option that leaves the business in complete control.
- Easy – Each time you need to withdraw funds you don’t need to arrange a new agreement; the pre-agreed limit will be available until the end of the term. Many lenders also have an online portal allowing easy and fast draw-downs.
A Revolving Credit Facility may not be suitable for all businesses depending on its requirements. There can be some disadvantages, such as:
- Short term funding – An RCF is designed specifically for short term use, typically between 6 – 18 months. If your business needs funding over a longer term, an RCF may not be suitable for your business.
- Security may be required – To arrange an RCF some lenders may require a form of security, such as a personal guarantee (PG).
- Interest rates – Interest rates on an RCF will typically be higher compared to a long-term funding solution.
Will it affect my credit score?
When applying for any form of business credit lenders will usually need to carry out a credit check to ensure the business is suitable for their product. This may involve a credit check on the business, as well as a credit check on the person(s) in control of the business.
If the business does not meet the terms of the agreement, such as late payments, this can negatively impact the business’s credit score. It is essential to ensure you are responsible with business credit. Here are some top tips to avoid causing a negative impact on your business credit:
- Make payments on time – As with any form of business borrowing you should ensure payments are made on time as per the agreement. This shows responsibility to lenders, and can help with obtaining increased limits or future business finance.
- Avoid multiple applications – Having too many credit searches on your file can be a sign of financial distress, and can be a warning sign to lenders. Before you submit an application it’s essential to understand any potential red flags in your business credit file.
- Keep balances low – Where possible, keeping balances low shows responsibility with business credit, and is likely to place you favourable in the eyes of the lender.
Where can I get one?
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