For many growing businesses, access to flexible finance can mean the difference between maintaining momentum and missing out on an opportunity. A revolving credit facility (RCF) is one such funding option that offers ongoing access to capital, allowing businesses to borrow, repay and borrow again as needed. It’s a powerful tool for managing cash flow, but like any financial product, it’s important to understand both the advantages and potential drawbacks before deciding if it’s the right fit.
What is a revolving credit facility?
A revolving credit facility is a line of credit that allows a business to draw funds up to an agreed limit whenever required. Unlike a traditional loan, where a lump sum is borrowed and repaid over a fixed term, a revolving facility works more like an overdraft. You only pay interest on the amount you use and once it’s repaid, those funds become available again. This flexibility makes it particularly useful for businesses with fluctuating cash flow or seasonal demand.
The benefits of revolving credit
- Flexible access to funds
Revolving credit provides fast and convenient access to working capital when it’s needed most. Whether bridging a gap between supplier payments and customer receipts or funding a short-term project, businesses can draw down funds immediately without reapplying for a new loan each time.
- Supports cash flow stability
For businesses that experience peaks and troughs in revenue, a revolving facility helps smooth cash flow. It can be used to manage payroll, stock purchases or supplier payments during slower periods, ensuring operations continue without interruption.
- Pay only for what you use
Interest is charged only on the amount drawn, not the full credit limit. This makes it a cost-effective solution for businesses that need occasional access to funds but don’t want to pay for unused capital.
- Builds financial agility
With pre-approved access to capital, decision-makers can act quickly on new opportunities. For example, a business can secure additional stock, respond to a large order or invest in short-term growth initiatives, all without waiting for lengthy loan approvals.
The drawbacks to consider
- Variable costs
While interest is only charged on the amount used, rates on revolving facilities can be higher than those on term loans. Additional fees for arrangement or renewal may also apply, so it’s important to understand the full cost structure.
- Risk of dependency
Easy access to capital can sometimes encourage overreliance. Businesses that regularly use revolving credit to cover ongoing expenses rather than temporary cash flow gaps may find themselves in a cycle of continual borrowing.
- Potential for reduced credit limits
If trading conditions change or financial performance weakens, lenders may review and reduce credit limits. This could leave a business with less flexibility just when funds are most needed.
- Shorter-term funding
Revolving credit is designed for short-term use, not long-term investment. Businesses looking to fund equipment, property or major projects may find asset finance, business loans or commercial mortgages more suitable.
Is a revolving credit facility right for you?
The best use of a revolving credit facility is as a working capital buffer, a tool to manage cash flow, not a substitute for permanent funding. When used strategically, it offers flexibility, speed and control, helping growing businesses respond confidently to change. However, this funding requires specific security arrangements, so it is important to ensure this type of finance solution is actually needed.
In summary
A revolving credit facility can be an invaluable resource for growth-minded businesses, offering quick access to capital and the ability to manage short-term cash flow challenges efficiently. However, it’s essential to use it wisely, understand the costs involved and integrate it into a broader financial strategy that supports sustainable growth.
For guidance on whether a revolving credit facility or another funding option such as asset finance, invoice finance, or working capital loans could best support your business, call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.