As a small company owner, cash flow is probably the most important thing when it comes to your business running smoothly. But, we know it doesn’t always work like that – late invoice payments, unexpected expenses, all chew into our money reserves. Having flexible funding available is a good back-up and one of the main funding options is a revolving credit facility.
A revolving credit facility is a type of credit that enables you to withdraw money, use it to fund your business, repay it and then withdraw it again when you need it.
We look at why more business owners are choosing revolving credit lines that any other funding options on the market.
Benefits of A Revolving Credit Facility
Withdraw, Replace, Withdraw Again: This is where the “revolving” part comes in. With a revolving credit line, you can withdraw only as much capital as you need from a credit line, replace it if you’d like, and then this amount becomes immediately available to withdraw from again!
Immediate Access to Cash Equals Greater Flexibility: True revolving credit lines are some of the fastest funding options available. Connected through technology, business owners can rely on their revolving credit lines to be immediately accessible to use whenever they need funds. This is especially useful to have in preparation of unexpected business challenges and opportunities.
No Real Estate Collateral Needed: Revolving business lines of credit are unsecured, meaning you don’t need to leverage any real estate assets as collateral.
No Prepayment Penalties: No penalty will be given to those who wish to pay their credit lines down or pay them off entirely at any time.
Higher Control Equals Lower Cost of Capital: Because you can control exactly how much you want to withdraw, exactly how much you need at a time, you can have piece-of-mind knowing you’ll never have to worry about borrowing too much.
Don’t Pay for What You Don’t Use: Unlike other funding options, you don’t have to pay for the total amount of your credit line borrowed. You can feel secure knowing you have available funds to draw from, even if you’re not using it.
Build Your Credit as You Use It: As you draw from and use capital from your revolving credit line, you are in turn building your credit score!
Things to consider when choosing a revolving credit facility
If you opt for a revolving credit facility, keep in mind that you might have to provide a personal guarantee as security for the finance. By offering a personal guarantee, you are agreeing that if your business can’t make the repayments, you become personally liable for paying off the debt.
Unsecured loans tend to have higher interest rates than secured loans. Some lenders also charge fees for setting up the revolving credit facility and others increase the interest charged when late payments are made. As with any type of business finance, it’s important to budget effectively to ensure that your business isn’t spending more than it can afford.
Revolving credit facility eligibility
Lenders will offer a maximum facility size based on the financial strength of the business and any security offered. Typically the only security will be a director’s personal guarantee.
In some cases, there is a commitment fee taken up front for ‘right to access’ the facility, plus the standard ongoing monthly interest charged on the funds drawn down at any one time. Because of their convenience and flexibility, revolving credit facilities tend to have higher fees than fixed term loans. The term will also likely be limited to between 6 months and 2 years — however, if all goes well, a lender will typically offer a renewal at the end of the term.
The amount a lender will look to offer is typically calculated as one month’s revenue, however in the case of strong businesses or repeat customers they may offer a top-up or an increase in the limit after just a few months. As they are generally short-term arrangements, revolving credit facilities are often available to businesses that would otherwise struggle to find credit.
The main concern for the lender is the amount of regular cashflow through the account, meaning for smaller deals they will often look at just the business bank account, and will often be able to support new companies (trading more than 3 months).
Summary
Revolving credit allows SMEs the flexibility to access money up to a preset amount, known as the credit limit. When the customer pays down an open balance on the revolving credit, that money is once again available for use, minus the interest charges and any fees. Talk to us today if this type of funding is an option for your business, we have access to the financial markets and can negotiate the best deal for you.