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Smoothing Cash Flow with a Revolving Credit Facility
Dealing with the financial day-to-day of running a business can be challenging. It’s a constant balance between the use of capital for investment and expansion, and making sure the cash flow exists to keep everything running smoothly. Stretch capital too far and meeting regular obligations can become dangerously tight, but hold back constantly and your business will never grow.
Having the flexibility to do both - and the backup to recover if you make a misstep - is essential for businesses at every level. One tool is a Revolving Credit Facility (RCF) - but what is it and how does it work? At Clifton Private Finance, we have the answers.
What is a Revolving Credit Facility?
A revolving credit facility (also known as a line of credit) is simple to understand if you’ve ever had a credit card. Though relatively small and developed for consumer, rather than business use, a credit card is a form of revolving credit that works in a similar way.
- Draw against a set limit - With a revolving credit facility, you draw capital as you need it, taking what you need until you reach the agreed upper limit.
- Repay and redraw flexibly - You can move money into and out of the revolving credit facility as you need, drawing down when capital is required and paying it back in when the funds exist. Some revolving credit facilities have a monthly minimum repayment, while others allow for full flexibility.
- Only pay interest on what you use - One of the greatest strengths of a revolving credit facility is that you only pay interest on the balance of the facility, not the total credit limit. This means less interest would be paid than with a term loan of equal size.
Revolving credit facilities typically also have a set-up fee and ongoing management fees, which should be taken into consideration when calculating the overall cost of the facility. These will differ based on the type of facility and how it is set up.
4 Common Types of Business Revolving Credit Facility
Most business revolving credit facilities are tailored to a specific purpose. This has the advantage that specialist lenders can offer superior underwriting that best meets your needs, potentially lowering costs, increasing loan-to-value (LTV), and driving down interest rates.
When you speak to a revolving credit adviser at Clifton Private Finance, we will discuss your business circumstances and explore and compare options to match you with the right lender and the most suitable financial solution for you.
The four most common business revolving credit facilities are:
- Secured revolving credit facility - These asset-backed facilities provide superior rates and credit limits by being secured against tangible business assets (such as high value machinery) or property.
- Unsecured revolving credit facility - Unsecured facilities tend to be smaller than their secured counterparts, due to the higher risk for the lender. Often, a personal director’s guarantee is used to mitigate some of that risk and improve rates. These low-to-mid-sized standalone lines of credit often work in a similar way to a bank overdraft facility, replacing those options with superior rates and flexibility.
- Invoice finance revolving credit facility - Accounts receivables represent a valuable intangible asset that specialist lenders and banks approve for lines of credit. Ongoing invoice discounting provides businesses with a well-developed method to expand without being constrained by client invoicing terms.
- Trade finance revolving credit facility - A wider umbrella term that encompasses stock-based securities, purchase order finance, and other supply-chain based assets, trade finance RCFs offer businesses in manufacturing and retail the opportunity to function as a smooth link in the supply chain.
7 Key Features of a Revolving Credit Facility
Unlike a traditional term loan, which simply provides a lump sum for use, followed by a regular defined repayments, revolving credit facilities provide greater flexibility and are designed to work as part of your cash flow structure, minimising costs and interest.
1. Flexible Drawdown and Repayment
The core function of a revolving credit facility is the ability to ‘dip in’ and ‘dip out’ as you need. It can be thought of as a pool of money that is there when it’s needed and can be repaid when the funds exist to do so.
In many ways, a line of credit acts as a financial partner, ready to provide funds when you need them, but otherwise remaining silent and letting you get on with your work.
2. Credit Becomes Available Again as You Pay
A revolving credit facility doesn’t shrink or go away when you repay it. Instead, the money that you repay into it becomes available to use again should you need it. In this way, it’s safe to repay it as the funds become available, knowing that you’re not limiting yourself should you need access to part of that capital again soon.
3. Only Pay Interest on the Amount Used
The cost of interest for debt finance is a significant consideration for business owners and finance officers. Revolving credit facilities help limit this burden as interest is only generated on the total used, rather than the full limit of the facility.
4. Access Funds Without Delay
Once a revolving line of credit is set up, there is no delay in drawing funds as they are needed and no requirement to go through creditworthiness checks or affordability and stress tests. By comparison, even a fast term loan can take days for the money to become available and require lengthy application procedures.
In this way, a revolving credit facility improves your business agility, allowing you to seize opportunities as they arise or cover unexpected difficulties without pressure.
5. Smooths Seasonal Cash Flow
Many businesses suffer from seasonal ebbs and flows. Revolving credit facilities help ease the burden during the slower months, with repayment of the facility settled in the more lucrative periods.
6. Offers Higher Credit Limits Than Overdrafts and Credit Cards
Standard bank overdrafts and company credit cards may offer somewhat similar structures to a dedicated revolving credit facility, but they cannot provide the level of funding a specialist line of credit presents. Tied to your business assets and other securities, a revolving credit facility can allow your company access to far larger levels of instant funding, giving you the power you need to grow your business as you need.
7. Scales With Turnover
Many specialist lines of credit are developed to increase as your business expands, automatically scaling as your turnover increases without the need for reapplication. By growing with you, your revolving credit facility offers confident financial support, both now and in the future.
How a Revolving Credit Facility Works in Practice
The following illustrative example explores some of the strengths and realities of a revolving credit facility:
XYZ Distribution is an SME making a mark as a storage and transport firm in the logistics and freight industry. Early start-up capital was used to secure an advanced warehouse facility, a small fleet of vans, and related machinery.
After two years of operations, XYZ is finding that industry-related challenges are choking cash flow, putting increased pressure on capital and stifling expansion.
After consultation with Clifton Private Finance, it is clear that XYZ would benefit from a revolving credit facility.
Using their warehouse as security, XYZ obtains a reasonably-sized revolving credit facility. Immediately, this provides them with the agility to speed up payments to suppliers and contractors, improving their standing.
XYZ is cautious with the facility, unwilling to over-extend and incur unnecessary interest charges. During early months, they use it gently to stabilise cash flow during tighter periods, repaying the balance three months later when business is busier.
Is a Revolving Credit Facility Better than a Term Loan?
Like many debt finance solutions, there’s no ‘better’ when comparing a revolving credit facility with a term loan, merely a ‘better fit’ for your business circumstances. With pros and cons for both, it’s important to properly assess your needs and choose accordingly.
When Revolving Credit Facilities Are Better Than a Term Loan
- You don’t know exactly how much you immediately need
- You expect to need more in the short-term
- Your income and cash flow are affected by seasonal or project-based volatility
- Peace of mind in having an in-place backup facility is important
- You don’t want to be locked into set debt repayments
- The money is for a clear, planned single investment
- You want a fixed interest rate and monthly debt repayments
- You want a set term after which the debt is cleared
When a Term Loan is Better Than a Line of Credit
- The money is for a clear, planned single investment
- You want a fixed interest rate and monthly debt repayments
- You want a set term after which the debt is cleared
Is a Revolving Credit Facility Different From a Business Overdraft?
While the structure of a bank business overdraft often mimics that of a separate revolving credit facility, they do differ significantly in terms of scale and purpose.
- An overdraft is tied to your main business bank account - By its nature, an overdraft is an extension of your bank account that becomes used once your balance reaches zero. An RCF is a separate facility, with its own management and repayment basis that’s detached from your bank account. This means you are not tied to bank rates or your relationship with your bank.
- Revolving credit facilities often offer larger limits - Unlike an overdraft, a revolving credit facility is secured by tangible assets (such as machinery) or intangible ones (as with invoice finance). This allows for a far larger credit limit, determined by the asset value rather than the factors that affect overdrafts, typically credit rating and length of relationship.
- Revolving credit facilities are more secure - The bank has the right to withdraw or reduce your overdraft without notice, especially if they consider it ‘overused’. A distinct revolving credit facility has its own independent agreement and defined terms from the outset, which will not be revaluated by the lender based on usage.
- Overdrafts are seen as emergency backups - The bank does not provide you with an overdraft expecting it to be used to fund a new project or for extended use. Rather, they are seen as very short-term, temporary structures to provide a little flexibility in uncertain times. A dedicated revolving credit facility is planned and secured, with the full understanding from the lender regarding its use. This allows them to be tailored correctly, often with lower interest rates and more flexible debt repayments.
Revolving Credit Facility Interest Rates
When considering debt finance, evaluating the costs and interest rates that will impact the long-term cost of the facility is important. Depending on the lender and the type of revolving credit facility, there will be:
- An arrangement / facility fee - This onetime fee typically covers the cost of the administration in setting up the facility and is usually between 1% and 3% of the credit limit.
- Valuation and legal costs - Secured facilities may face initial costs to cover legal management and an independent valuation of relevant assets used as collateral.
- Ongoing line fees - Some facilities, for example, invoice finance lines of credit, may charge an ongoing line fee each month for the continuation of the facility.
- Renewal fees - While not as costly as initial arrangement fees, renewal fees may occur annually as the facility is revised.
- Interest rates - Interest rates vary, but interest will be charged on the portion of the facility used. Interest is typically calculated daily and applied monthly.
What Affects Revolving Credit Facility Interest Rates?
Interest rates will be calculated on a case-by-case basis, taking into account your business risk profile and the associated underwriting. The factors that are typically considered when lenders determine interest rates are:
- Secured or unsecured - Secured facilities are lower risk for lenders and thus have a lower interest rate than their unsecured counterparts.
- Business credit history - Your credit rating, or creditworthiness, will be a major contributor to the interest rates. Applicants with poor credit should speak to a specialist adverse credit adviser at Clifton Private Finance. We can match you to specialist lenders who are willing to offer you facilities that take a holistic approach to your application, often offsetting your credit history with more recent accounts and trading improvements.
- Facility size - The credit limits in place will be considered when calculating interest rates. Larger secured facilities often command lower interest rates than smaller ones, while unsecured facilities tend to rise in rate as the size grows.
- Business sector - Your industry will be evaluated and form part of the underwriting model that determines rate.
- Expected usage - Lenders tend to favour consistent, predictable facility use. Businesses that do not touch their revolving credit facilities and then suddenly draw a large amount will be seen as more unpredictable and risky than those that engage steadily with their facility. Explaining your use at the setup stage will be part of the interest rate calculation.
- Market forces - As significant as any other factor, current market conditions, including the Bank of England base rate, are key to determining interest rates for all lenders.
Secure a Revolving Credit Facility with Clifton Private Finance
At Clifton Private Finance, our business finance team is here to help you get a revolving credit facility that is tailored to your needs, offering the most competitive interest rates and flexible terms. We will discuss your business circumstances with you in detail to build a comprehensive picture of your requirements, then compare from the wide spread of lenders in the UK marketplace to find the best fit.
We can advise you on all aspects of your debt finance, evaluating your needs to determine whether a revolving credit facility is the right choice, and working with you on the application to make the process as smooth as possible. With access to specialist lenders, we can quickly match you to the right RCF provider, lifting the strain on your cash flow and unlocking your business potential.
Whether you’re looking for a large-scale secured line of credit, a short-term unsecured facility, or need help getting your business turned around after a period of stretched capital and missed payments, we have the expertise you’re after.
Contact us today for a free consultation and release your business from its financial burdens.
