Revolving credit facilities / business lines of credit

Revolving credit is a great way for businesses to borrow money — without having to always go through a loan application process.

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What is a revolving credit facility?

Revolving credit facilities are lines of credit — arranged between a bank and a business.

Like with overdrafts, revolving credit facilities allow you to access pre-approved funds — as and when needed. Interest is then charged on the amount borrowed — while it remains outstanding.

Revolving credit facilities are a form of working capital finance.

Revolving credit facility — considerations

A Revolving credit facility is also known as bank line, operating line or a revolver. It is similar to an overdraft and credit card — but differs in the fact that access to credit is not tied to a specific bank account.

Revolving credit facilities have an established maximum draw amount and companies can access the money at any time. This form of credit is mostly used for daily business operations — particularly when a company has unexpected expenses or experiences sharp fluctuations in cash flow.

In this way, a revolver is seen as a type of short term business financing — that can support a business’s working capital.

A revolving credit facilty allows you to borrow and repay, as often as you need, within an overall agreed credit limit and during an agreed term — without having to constantly reapply for finance. In other words the credit “revolves”.

This slightly differs with a business line of credit — which does not always offer “revolving” credit (although it can).

How do revolving credit facilities work?

Businesses interested in a revolver, would need to apply to a bank beforehand — the bank then asses your credit worthiness.

Several factors are taking into consideration including — cash flow statements, income statements and balance sheet statements. Demonstrating good credit scores, steady income, strong cash reserves and having assets — increases the likelihood of being approved for lines of credit.

If the bank agrees to provide you with the revolving credit facility — they will tell you the applicable interest rates and the maximum amount that you can borrow. Some banks will also require a commitment fee — where they are compensated for keeping the revolver open.

Your business is free to make use of the funds at any time. You are able to borrow and repay, over and over again, until the term of the revolver ends.

Benefits of a revolving credit facility

  • Very flexible way of borrowing
  • No collateral needed
  • Facility can grow as your business grows
  • No charges for early repayment
  • Interest paid only on monies actually borrowed — rather than the credit limit
  • Ideal for cyclical cash flow challenges
  • Applications approved relatively quickly
  • No long-term commitments

Limitations of a revolving credit facility

  • Interest rates can be higher than traditional unsecured loans
  • Not a long-term funding option — facility is subject to annual review
  • Some lenders may require a personal guarantee

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