Revolving credit facility

Here we detail how a revolving credit facility works compared with business loans and overdrafts. But if you're looking for a business loan, iwoca's flexi-loan may suit your needs:

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What is a revolving credit facility?

As the name suggests, revolving credit is an ongoing form of finance. Borrowers can access money repeatedly and repay it over time because the credit facility remains open. There is no fixed number of payments, but there is a set limit. For example, credit cards are a common revolving credit facility for consumers. 

A non-revolving line of credit is different. It's a one-time financial arrangement that ends when the borrower uses all the credit. A revolving credit facility is like a cash advance and can help businesses that need to boost their working capital.

How does a revolving credit facility work?

Think of it as a loan that automatically renews without an end date. When you are approved for revolving credit, the lender will give you a credit limit. This limit will be replenished every time you use the loan, whether you use a little or the full amount. 

With a revolving credit facility, you won’t pay anything until you start using your credit line. You can withdraw whatever amount you want up to your agreed credit limit, and you’ll pay a fixed interest rate, usually daily, only on the amount you take.

Example of a revolving credit facility

For example, let’s say a builder takes out a revolving credit facility with a limit of £5,000. The business then withdraws £3,000 to buy materials, repaying the amount plus interest over the next three months. Once the builder has cleared the debt, they can access the full £5,000 credit facility again.

How much can you borrow with a revolving credit facility?

Your lender will set the greatest amount based on a review of your business and its needs, as well an assessment of the risk of lending you money. Each case is different so the amount you can borrow could be small or very large. Although criteria vary, lenders often set your credit limit as one month’s turnover for your business. If you prove to be a reliable customer, they may increase this amount.

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Revolving credit facility FAQs

There are a lot of options out there when it comes to business finance. Here are some of the common questions we get asked

Advantages and disadvantages of a revolving credit facility
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The main advantage of a revolving credit facility is that it provides you with flexible access to money whenever you need. Businesses can use revolving credit to manage cash flow, especially during seasonal trade fluctuations. This helps keep their operations running smoothly. With revolving credit, you have the confidence that funds are always available, and you can repay at your own pace.

Another advantage is that you’ll pay less interest than you would with credit cards. Credit facilities are often asset-secured, which means the assets help to lower the interest rates. 

On the downside, if you don’t use revolving credit carefully it may negatively impact your credit score. For example, a high credit utilisation rate will lift your credit score and damage your rating. Also be aware that credit agreements often include a clause that permits lenders to close or reduce a line of credit at their discretion. 

Other factors to think about include revolving lines of credit that may require personal guarantees or a commitment fee. The commitment fee is a payment for the privilege of using the credit facility in the future. Also, approved loan amounts can be lower than other types of funding, so revolving credit may not be suitable if you need significant capital.

Revolving credit facility vs business loan
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A traditional business loan differs from a revolving credit facility in that you’ll receive a lump sum that you repay regularly with interest over a fixed period, typically between one and five years. There are many different types of business loans. Whilst terms and eligibility requirements vary, the two broad categories are secured and unsecured loans. If you take out a secured business loan, you’ve agreed the lender can claim anything you don’t repay against something you own, like your house). An unsecured business loan isn’t tied to any of your assets. 

Whether you need a small business loan or flexible finance, you have many options and applying for a business loan is straightforward.

What is the difference between a business revolving credit facility and a business overdraft?
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A business revolving credit facility and a business overdraft are both types of working capital finance, and both charge interest on the amount you use. Banks offer overdrafts and they’re linked to your current account. You’re allowed to withdraw money from this account up to a limit, even if the balance is zero. Any lender can provide revolving credit facilities, not just banks – and with these you can borrow up to your credit limit, repay this amount (with interest), then borrow again against your original credit amount – hence ‘revolving’.

Revolving credit facility vs credit card
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Revolving credit facilities and credit cards are similar but have some important differences.

A revolving credit facility typically provides a higher credit limit compared to a credit card. This can be beneficial for larger purchases or ongoing business expenses that may exceed the limit of a credit card.

Credit cards often have benefits and rewards that attract consumers who want to earn points or cashback. Revolving credit facilities may not offer such incentives.

Credit cards usually have a fixed repayment term. But with a revolving credit facility, you can borrow and repay continuously over a set time. This flexibility can be helpful for individuals or businesses with fluctuating financial needs.

Alternatives to a revolving credit facility
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Alternative finance is an ever-expanding field. From crowdfunding and small business grants, to P2P lending, iwocaPay and Flexi-Loans, there are many innovative forms of finance in today’s marketplace.

Tips for choosing a revolving credit facility
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To choose the right revolving credit facility in the UK, you should think about a few things that match your financial needs.

  • Figure out how much money you need to borrow and decide on the right credit limit for you.
  • Compare interest rates and fees associated with different lenders to find the most competitive option.
  • Consider the repayment terms and flexibility offered by the revolving credit facility. Some lenders may provide options for early repayment or flexible repayment schedules.
  • Review any more benefits or perks offered by the lender, such as reward programs or discounts on other financial products.

To choose the right credit option, evaluate factors that suit your goals and save money.

Qualifying for revolving credit facility
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To qualify for a credit facility in the UK, your creditworthiness is assessed. This includes your credit history, income stability, existing financial obligations, purpose of the credit, and ability to repay. You can improve your chances of approval and get better terms by having a good credit score.

Managing a revolving credit facility in the UK
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Effective management of a revolving credit facility is crucial to avoid potential financial pitfalls. Here are some tips to help you stay on track:

  • Create a budget to ensure you are using the borrowed funds wisely and not exceeding your repayment capabilities.
  • Regularly check your account activity to track your spending and identify any fraudulent charges or errors.
  • Make payments on time to avoid unnecessary fees and maintain a positive credit standing.
  • To pay less interest and finish faster, pay more than the minimum each month.

By following these steps, you can effectively handle your credit and stay financially stable.

The iwoca story

Over the past eleven years iwoca has grown from an ambitious fintech start-up to one of the fastest-growing and biggest business lenders in Europe. Now we're a team of around 400 in London, Leeds and Frankfurt working towards the goal of funding one million small businesses.

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