Revolving Credit Facilities
Revolving Credit Facilities are essentially a pre-approved loan that a company can dip in and out of on a need’s basis. Companies will generally pay a small fee up front for setting up the facility and in most facilities are only charged interested when the facility is being used.
They are a modern form of Working Capital Finance and have somewhat replaced the Bank Overdraft, which High St banks tend to make difficult to access these days. A revolving Credit Facility is a great way for a company to release working capital if they have clients that often pay late or need short term finance on a continual basis.
How do revolving credit facilities work?
Revolving Credit Facilities are rolling contracts that are renewed and are not a standard fixed length -like standard business loans. This means there is a limit to which a company can withdraw from the facility and there is often a maximum time that the money can be withdrawn for. Saying this however, once money is put back into the account it pays back the oldest loan first, meaning there is instantly more credit that can be borrowed. It is a revolving facility that can be used again and again.
It is very similar to a credit card in some ways and companies such as Capital on Tap actually give you a physical Credit Card if you sign up to their Revolving Credit Facility.
Eligibility & Criteria
Revolving Credit Facilities are short term arrangements, which means they are accessible to a wide range of businesses, including businesses that may normally struggle to access finance. The main lenders focus on is cashflow. Does the company have enough cashflow through the business to pay off this facility?
As the size of the facility given in the first place is limited by the strength and turnover of the business and directors personal guarantees, this derisks this type of lending for lenders. Meaning companies that have only been operating for 3 months and can show good cashflow can usually get this type of facility.
Usually the amount leant at the offset will be around one month’s revenue, however after a customer is able to prove that it can use the facility responsibly and has strong cash coming into the business, this can be often extended.
Fees tend to be higher with Revolving Credit Facilities as they are incredibly convenient and flexible for businesses. They have ‘set’ terms of a maximum of 2 years but are often renewed as long as the facility is being used responsibly. Companies that don’t need it anymore can just simply stop using it for no extra costs.
There are lots of advantages to Revolving Credit Facilities. Here are some brief highlights.
Speed - Set up in hours
Business Loans can take days to set up, whereas Revolving Credit Facilities can take hours to be set up and be available. Due to the lower risk to lenders, Revolving Credit lenders tend to use automated lending software than can integrate with your accounting software package(Sage, Xero etc..), This means that for some sectors credit decisions can be instantaneous and can all be done internally on a needs basis.
This makes Revolving Credit Facilities a more reliable type of finance for companies that struggle with cashflow to onboard new clients or make strategic decisions based on cashflow and sales. It takes the emphasis off waiting for people to pay their invoices on time.
Keep the old agreement
If you need to borrow lots of small amounts all the time, having to read and sign new credit terms each time you want to borrow, is time consuming and painful. The positives of Revolving Credit Facilities is that the same contract is used for all lending.
This means there is less risk for the business, as they don’t need to spend hours going through paperwork or running the risk that something has changed with the current operation that could have been in place for years. By keeping the old agreement in place for whenever the money is accessed, it saves time and money for the businesses and owners.
Lots of businesses need short term pieces of finance for weeks at a time. It could be to get them through invoicing or production periods, on boarding new clients or just to pay suppliers at the end of the month. Short term loans don’t really work in these situations as they are rigid, set for a time period and short-term loans for 1 month tend to be really expensive.
Revolving Credit Facilities are designed to fill this gap nicely. While they are expensive on the long and medium term, on the short, short term they are much cheaper than conventional loan facilities. They are also offered to companies that haven’t been trading for less than two years or still may have small turnovers.
Keeping Suppliers Happy
There are lots of industries where your suppliers have the power to make or break you. If you don’t pay your suppliers on time they may take away your line of credit, they make increase their prices or they may refuse to sell to you. All of these options put your business in limbo.
If you have a business where your stock turnover is relatively short term, such as an eCommerce store, then you may need access to finance to buy the stock that you are going to sell. You will get paid once it is sold, which may sometimes be days or weeks.
These are perfect situations for a revolving credit facility. You only need to use it when you need to pay your suppliers back promptly or need to buy stock to sell. There is always a lag in any product or service company and a revolving credit facility may be the perfect stop gap between the two.
No security required
Unlike other credit facilities, Revolving Credit Facilities don’t require any sort of asset guarantee against them. Meaning your company or its directors don’t have to own property or machinery etc.. to use as a guarantee. Saying this however, the directors of the company will still be asked to usually give a personal guarantee against the facility. This means that they will personally shoulder the debt if the business is no longer able to pay it back.
A part of a bigger funding plan
Often facilities such as a Revolving Credit Facility is a part of a much larger finance strategy. Often it will be used alongside Asset Finance, Trade Finance or even Supply Chain Finance to help a business access enough capital to run and implement a growth strategy.
As they are low risk, other lenders see these facilities as a part of doing business and only see the size of the facility the only potential risk.