Revolving Credit Facility
Cash is essential for business operations. But what if, like 57% of UK SMEs, you’re facing cash flow challenges?
A revolving credit facility might be the solution you need. Here’s what you should know about this alternative financing option.
What is a Revolving Credit Facility?
A revolving credit facility allows businesses to access funds, use them for various expenses, repay the borrowed amount, and then borrow again as needed. This flexible funding option provides a pre-approved line of credit that can be used and repaid repeatedly.
Unlike business credit cards, which involve card transactions, a revolving credit facility typically provides cash directly to your account. This makes it particularly useful for tasks like paying employees or addressing overdue bills, often with higher credit limits suited for effective cash flow management.
How Does It Work?
Upon approval from a lender, you receive a line of credit that can be deposited into your account or provided through other means like a transfer or cheque. You can then use the funds, repay the borrowed amount plus any interest, and borrow again whenever necessary. Interest is charged only on the amount you withdraw, not on the entire credit limit.
Benefits of a Revolving Credit Facility
Flexible Usage: You can withdraw, repay, and reuse funds as needed, making it ideal for unexpected projects or expenses without the obligation to use the credit if you don’t need it.
Unsecured Options: Most revolving credit facilities do not require collateral, meaning you don’t have to risk any business assets.
Cash Flow Management: This facility can help you manage cash flow, especially when supplier payments are due before client invoices are paid.
Drawbacks and Risks to Consider
Risk of Arrears: Missing payments can lead to serious consequences for your business. It’s crucial to assess how much credit to use carefully to avoid overextending yourself.
Variable Interest Rates: Interest rates may fluctuate, which can impact your repayment amounts.
Fees and Penalties: Be aware of potential fees associated with the facility. Missing payments may incur additional penalties.
Higher Interest Rates: The short-term nature of revolving credit can result in higher interest rates compared to traditional fixed-term loans.
How to Apply for a Revolving Credit Facility
If you’re considering a revolving credit facility, we can assist you as a broker. We connect borrowers to lenders offering amounts from £1,000 to £20 million. Simply submit your details, and we’ll help you find suitable lenders.
Whether you use our services or look for lenders independently, it’s essential to compare your options. For instance, one lender might provide a lower interest rate but with a smaller credit limit, while another may offer a higher limit but require a personal guarantee. Evaluate all available options before making a decision.
Once you identify a suitable lender, prepare the necessary documents (like a business plan, cash flow projections, and company information) and submit your application. After that, you’ll just need to wait for a response.
Also, check with your current financial provider; they may already offer this service and could provide you with a favorable solution.
Tips for Managing Your Revolving Credit Facility
Credit Score: Always make timely and complete repayments to maintain a positive impact on your credit score.
Careful Borrowing: Only borrow what you can afford. Be strategic about how much you use, considering the revolving nature of this financing.
Emergency Fund: Having an emergency fund can make it easier to manage repayments.
Budgeting: Good credit management starts with a solid plan. Create a budget that outlines your expected earnings and expenses to identify any potential gaps, helping you avoid surprises.
FAQs
Whether a personal guarantee is required depends on various factors, including your business, the lender, and your financial situation. Typically, if your business is new, has a low credit score, or is seen as high risk, you're more likely to be asked for a guarantee.
Secured loans require collateral, such as property, to back the loan, while unsecured loans do not. Revolving credit facilities can be either secured or unsecured, depending on your choice and your lender's terms. Generally, secured loans tend to have lower interest rates compared to unsecured options.
Revolving credit facilities differ from credit cards in that the funds are typically deposited directly into your account or accessed in another non-card manner. Exceeding your credit limit works differently too; it’s often only allowed if a soft limit is set. Consequences for going over this limit can vary by lender, potentially leading to higher fees, negative impacts on your credit score, or increased interest rates. It's important to maintain open communication with your lender to stay informed about your options and any potential consequences.
In a term loan, you receive a set amount of credit along with a defined repayment schedule. You repay the principal amount plus interest and any fees, at which point the loan is fully settled. In contrast, a revolving credit facility provides you with a credit limit, allowing you to withdraw funds as needed, repay them, and borrow again at your discretion.
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