What is a revolving credit facility and how does it work?

You need access to some quick cash – a loan or refinance would be over the top and slow to arrange, your assets can’t be liquidated (not easily, at least) and your existing cash is all earmarked for other causes.

Now what?

If you’ve got a revolving credit facility, you might not even have to ask the question. Revolving credit can be fundamental to everyday operations for some SMEs.

If you’re not sure what it all means or you want to deepen your knowledge of revolving credit, this article should provide all the answers you need.

 

What is a revolving credit facility?

Revolving credit is a flexible way of borrowing money for your business, usually for short-term needs. Examples include overdrafts, credit cards and some supply chain finance.

• Your lender sets your credit limit (eg. £25,000) and gives you instant access to it

• Once it’s set up, you don’t have to apply or serve a notice period to use the credit

• You only pay interest on the credit you use, for however long you use it

• You might also have to pay fees for opening and maintaining the facility

Unlike a loan, a revolving credit facility is an indefinite credit agreement (provided your business remains operational and creditworthy).

 

Why is revolving credit so important for business?

Liquidity is oil to the engine of many SMEs. Revolving facilities help everything keep moving without interruption.

No doubt you can think of a time you needed some extra cash. Access to a revolving credit facility turns these tricky situations into non-events.

 

Improved cashflow management

If your accounts payable and receivable get too intertwined, one late payment can cause a big knock-on effect.

Revolving credit takes this stress away, giving you a cash buffer to dip into as and when your incomings and outgoings fall out of alignment. You won’t have to delay payments or divert cash from other projects.

 

 

Access to capital for growth and expansion

If an unexpected opportunity arises, a business might use a revolving credit facility to top up the funds they need to seize it.

This comes with lots of caveats. Revolving credit facilities are best suited to short-term requirements. They should certainly not be used to invest in uncertain or risky ventures, nor should they be the sole source of funding for an investment.

 

Short-term working capital needs

Demands on working capital can fluctuate from month to month and revolving credit can insure against this variability.

For example: if you receive a larger order than normal, you could use a revolving credit facility to pay for the additional materials it requires. The payment you receive upon delivery would repay the debt, as well as adding to your profits. Otherwise, you’d have to delay or refuse the order.

 

Emergency fund access

Every business should hold an emergency fund of some kind.

Revolving credit can serve as your last line of defence if you’re in a position where you can’t delay or don’t have immediate access to your emergency fund.

You also have the opportunity to hold your emergency cash in a savings account with a good interest rate. You could use credit to pay for an emergency and quickly repay (at least some of) the debt as soon as you’re able to access your cash.

 

How one business uses revolving credit, a real-world example

Tom Sangers is the founder and managing director of Metric Hub, a digital marketing agency in the southwest of England. He explained how his business uses credit to manage cashflow and make the most of flexible borrowing.

"Aside from the cashback benefits, our credit facility provides us with flexibility for larger purchases like work laptops. We can avoid lengthy 24-month credit terms and instead pay off the balance within 2 to 4 months, helping us manage cashflow more effectively."

How a revolving credit facility works

It’s relatively simple to set up a revolving credit facility with most banks and lenders. These products are popular, so the process is generally quick and well-established.

Every lender and product will have its own terms and conditions, so you’ll need to check these details yourself.

 

Application and approval process

The right lender for you will depend on everything from their eligibility criteria (eg. existing customers only) to their interest rates and product fees.

Lots of lenders will require at least some of the following:

• A credit check (so keep building your business credit score)

• Proof of incorporation and address

• Proof of identity for at least one director/person with significant control

• Financial records and forecasts

• Security (either a charge over the company or personal guarantee)

• Your preferred credit limit

If you pass their checks, you’ll be approved and can start using your credit.

 

Borrowing and repayment cycle

Your facility will be live and ready to use. You won’t pay any interest until you start using it, although there may be a one-off arrangement fee.

When you start borrowing from your revolving facility, you’ll then begin the repayment cycle. Let’s explain with an example:

1. You use £10,000 of your £25,000 credit limit

2. The lender begins charging you interest on the debt from the day you initiate it

3. You can then:

   1. Use up to £15,000 more credit with no penalties, but be charged interest on the added debt, or

   2. Begin repaying the debt to restore your credit limit to the full £25,000, or

   3. Do both at the same time

Some lenders and products use fixed repayment schedules, others are open-ended.

 

Interest rates

All credit facilities will charge you interest. Honestly, that’s how the lender makes their money and why the product exists.

Interest rates can vary quite dramatically between lenders. At the time of publishing this article, you can find rates for business overdrafts as low as 11% and others closer to 20%.

The rate on your facility isn’t the only factor to consider. The credit limit available, ease of use and existing relationships all matter, too.

 

Product and arrangement fees

On top of charging interest, some lenders have arrangement fees (an initial one-time payment) or a product fee (an ongoing charge).

These are usually either a fixed fee or a percentage of your credit limit, but exist regardless of how much credit you’re using.

 

The benefits of a revolving credit facility

Nobody loves paying interest, but lots of business owners love what revolving credit facilities offer their business.

There are obvious and more subtle benefits to be found in this type of borrowing, several of which we look at in more detail below.

 

Flexibility in borrowing and repayments

Imagine having to fill out a loan application every time you needed an extra couple of thousand pounds. There’d be no small or medium businesses left in the UK after a year or two.

Compared to term loans, credit facilities are low-admin, quick-moving and have relaxed terms.

With no strict repayment schedule, you’re free to scale your repayments up and down in line with your cashflow and expenditure.

 

Access to funds on demand

The slow part of arranging finance is the arranging part; moving money from a lender to a customer is done in the blink of an eye. Once your credit facility is arranged, it’s there for you to use without question or delay.

Even the quicker types of finance (like a working capital loan) take days, rather than the minute it takes to use an overdraft or credit card.

Having immediate access to working capital gives you the freedom to jump on opportunities, as well as the security to take unexpected problems in your stride.

 

Financial management and cashflow improvement

With a revolving credit facility in place, a late-paying customer is an annoyance rather than a crisis.

Even businesses with robust financial processes can get caught out by cashflow stress.

Having short-term debt available to fill a cashflow gap or improve liquidity is just one more tool in the belt of a well-prepared business.

 

Improving your business’ credit score

Drawing from and regularly repaying your credit can help your business’ credit score.

Credit utilisation and repayments are key metrics when credit agencies and lenders look at your creditworthiness. Carefully using your revolving credit facility can benefit your business long-term, when it comes to future credit applications.

 

The risks and drawbacks of a revolving credit facility

Higher interest rates, tough penalties and strict limits – revolving credit facilities have their drawbacks as well as their benefits.

It’s important you understand the risks involved in opening and using this kind of facility. We’ve explained some of them below, but you should speak with your accountant for bespoke advice.

 

Potential for overborrowing

Debt management is a critical part of your finances. Do it well and debt can help you grow. Get it wrong and you can damage your business. That can force you into cost savings and other difficult decisions.

You need to be confident that you can afford the repayments on your credit facility and other debts. This should include stress-testing. If interest rates change or your revenue falls, a manageable debt position quickly becomes unmanageable.

 

Interest costs and fees

Revolving credit facilities can be one of the more expensive ways to borrow money.

Short-term borrowing leads to high interest rates, high interest rates lead to short-term borrowing. It’s unclear which came first!

You should check all of the options available to you before using your credit facility. It might be cheaper to borrow money using a different product.

 

Credit score impact

As with any credit product, if you use it appropriately, it can be to your benefit.

But if you misuse your credit facility – be it through accumulated debt, underpaying or overborrowing – your credit score could fall. This will make it harder for your business to borrow money in the future.

 

Minimum payments trap

If you’re juggling multiple debts at once (which isn’t always a problem, as we’ve discussed here and elsewhere), you can end up stuck in a long loop of minimum payments.

With minimum payments, most of your payment is eaten up by interest rather than paying down the principal. This can extend your debts over a longer-term, costing you more in interest and restricting expenditure.

 

The most common uses of revolving credit facilities

No two businesses are the same, but their use of revolving credit can be. There are countless ways to use these facilities in day-to-day operations, but these popular examples provide some useful context.

 

Business operations and working capital

Cashflow is rarely linear. In fact, it can be highly unpredictable. Leaner periods are often nobody’s fault, but a result of payment cycles or project timelines.

In these periods, a revolving credit facility can act as a safety net. Rather than juggling dwindling cash reserves – or using a loan to cover a relatively small shortfall – you can dip into your credit facility.

 

Urgent funding

We’ve discussed how credit can be part of an emergency fund strategy, but not all emergencies are problems. You can find plenty of urgent opportunities, too.

If a supplier is offering a limited-time bulk discount or a particular piece of machinery gets listed for sale, time is of the essence.

A credit facility gives you agility when it’s most needed.

 

Seasonal and cyclical business needs

Seasonal fluctuations affect plenty of sectors, including some less-obvious ones.

Retail and agriculture have clear peaks (eg. Christmas or harvest), but even service-based businesses report regular highs and lows. The flexibility provided by revolving credit means SMEs can ride the waves of seasonality with minimal interruption.

Retail businesses can add new stock, even if the old stock hasn’t sold yet.

An accountant can pay a temporary assistant’s salary without having to wait for clients to pay their annual fees.

 

Comparing revolving credit facilities to other credit options

There’s more than one way to borrow money, so it seems right to introduce some other options here.

We’ve put together a topline overview of revolving credit facilities in comparison with traditional, term loans and lines of credit. It’s hard to compare specifics, as lenders and their products can vary so much.

Take all of this data as generalised, not specific to any particular product or lender. Do your own research and work with a financial professional before deciding on anything.

	Revolving credit facility	Traditional loan	Line of credit
Explanation	An ‘always on’ source of funds you can draw from and repay as you need, up to your credit limit.	A one-off, lump-sum payment made to you that you then repay for a set term.	Like revolving credit, but with a fixed term and each drawdown reduces your total available credit
Fixed term	No	Yes	Yes
Repayment schedule	Sometimes, including minimum payments	Always	Sometimes
Instant access	Yes	No	Yes
Interest rate	10% - 20% AER* (based on desk research in December 2024)	6% - 15% AER* (>according to Money)	Not enough publicly available, reliable data
Secured or unsecured	Unsecured	Either	Either
Typical use cases	Short-term finance or covering working capital	Large capital investments (eg. assets or a merger)	Contributing to recurring expenditure

 

You could also speak to our growth finance team, who can provide flexible and bespoke finance for growing businesses. If the options above don’t seem quite right for you, or you’re curious to explore alternatives, this would be the place to go next.

 

Credit where credit is due

Credit comes with risks – debt is debt, no matter what form it takes.

But debt isn’t a dirty word. If you can afford it and are using it strategically, debt management can be a crucial part of a healthy and growing business.

Revolving credit facilities are a popular way for businesses to hold and use debt, partly due to their flexibility. The ability to dip into your credit when it’s needed and repay flexibly can be a genuine game-changer.

Whether you’re new to the idea or know your overdraft like the back of your hand, we hope this article has given you food for thought and a deeper understanding of this useful facility.

Contact your relationship manager if you’re interested in revolving credit for your SME.

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Links were live and information was correct at the time of writing the article.

'AER' stands for 'annual equivalent rate' and is designed to make it easy for you to compare savings products. It illustrates what the interest rate would be if interest was paid and compounded once each year.

Disclaimer: This is information – not financial advice or recommendation

The content and materials featured in this article are for your information and education only, and are not intended to take into consideration any particular recipients’ financial situation. The product details and interest rates referred to are correct at the time of writing.

The information does not constitute financial advice or recommendation and should not be considered as such. Allica Bank will not accept any liability for any loss, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.