29-February-2024
29-February-2024 10:52
in Commercial
by Sam Hodgson
A revolving credit facility, sometimes called a “line of credit”, is one of the more powerful tools available to businesses looking to manage their cashflow, but how does it work and what makes it different to the other types of business finance? More importantly - how can you use a revolving credit facility to best improve and manage your business?
Contents
What is a Revolving Credit Facility?5Benefits of a Revolving Credit Facility7Types of Revolving Credit for BusinessesHow to Use a Revolving Credit FacilityDoes Revolving Credit Affect Your Business Credit Rating?Revolving Credit vs. Business LoansHelp with Revolving Credit
What is a Revolving Credit Facility?
Arevolving credit facility is a business finance product that provides you with a pool of money you can dip into and out of whenever you need. As it’s credit, when you borrow money you pay interest, but it provides a considerable amount of flexibility to fit your business needs compared to other finance options.
You only pay interest on the amount you borrow, and can draw on it up to a predefined credit limit.
The most used and best understood revolving credit facility is that of a credit card.
However, many other types exist, such as invoice finance, merchant cash advances, supply chain finance and more, which are more tailored to specific types of trading, and are often more suitable for certain businesses.
In this guide, we'll explore all the options, and compare them to other types of finance available on the market.
And if you need help deciding what type of revolving credit facility - other any other type of business finance - is right for your business, book a free consultation with an expert, below.
5Benefits of a Revolving Credit Facility
Here are the 5 keyadvantages of using a revolving line of credit facility.
Flexibility
Revolving credit is the most flexible way to borrow money.
You borrow money only when you need it and can relax, knowing exactly how much room you have to breathe. Repayments are also often very flexible, with minimum monthly repayments in place to ensure that money flows both ways but no prevention on using that money again almost immediately.
Building Your Credit Score
A well-managed revolving credit facility is an excellent way to show your fiscal reliability, making it an excellent method of rapidly building your business credit score.
Ease of Use
Once the line of credit has been set up, it can be called upon instantly, making it exceptionally easy to use. Many lines of credit function similarly to bank accounts with their credit limits emulating a positive balance, and can be used in almost identical ways.
Lower Interest Payments
Because you only pay interest on the amount you borrow, it is possible to have the confidence of the revolving credit facility behind you, while not having to pay any interest on unused potential credit. With proper management, this can be considerably more cost-effective than a loan, even if the advertised interest rate (AER) is higher.
Growth Over Time
As you become more valued as a reliable line of credit customer, your finance provide is likely to increase your credit limit, providing you with larger reserves for use with no need for long-winded future credit applications.
7Types of Revolving Credit for Businesses
Businesses have access to a number of different revolving credit facilities:
1. Credit Cards
Any business credit card is a revolving credit facility that offers all the advantages of the product. With a variety of credit cards on the market, offering a range of interest rates, fees, and benefits, selecting the right credit card for your business can be quite time-consuming.
Credit cards often come with enticement bonuses, making them an excellent partner for businesses where significant use will build up those rewards.
Typical rewards include discounts on flights, hotels, and other business travel; cashback bonuses; entertainment tickets and discounts; and more.
Credit card providers are extremely likely to raise the credit limit regularly to good customers who manage their card use well.
2. Bank Account Overdrafts
Your business bank overdraft is the second most common revolving credit facility utilised by UK businesses.
Primarily for use to ensure that no payment goes unpaid due to a temporary lack of funds, bank overdrafts can also be used in a similar way to a credit card, providing instant cashflow when it is needed.
Leaning too hard on a bank account overdraft can, however, be imprudent. Some institutions will look to remove or lower overdraft facilities if they are seen to be abused, often at short notice.
3. Invoice Finance
B2B businesses who struggle to bridge the gap between an invoice being issued and the customer making payment may want to look to invoice finance revolving credit facilities for additional cashflow flexibility.
With invoice finance, a line of credit is arranged with a credit limit that’s tied to your accounts receivable - often significantly larger than either a credit card or overdraft. Like other revolving credit, invoice finance can be used as and when it is needed, though ongoing fees mean it is always worth considering properly as part of your long-term financial planning.
4. Merchant Cash Advance
An arrangement that’s made with your card transaction provider, a merchant cash advance is a revolving credit facility that’s based on your quarterly or annual card transaction takings.
Providing a flexible way for shops and those in the service industry who interact with the public for frequent credit and debit card payments, merchant cash advance offers B2C businesses a similar level of cashflow management as invoice finance in the B2B sector.
5. Supply Chain Finance
The mirror to invoice finance, supply chain finance is a line of credit that enables you to pay your invoices early, improving your supplier relationships and ensuring that you are never responsible for breaking the chain of supplier-buyers in complex transactions.
6. VAT and Corporation Tax Loans
While many financial products designed to help with ensuring HMRC are paid on time are loan products rather than lines of credit (corporation tax loans and VAT loans), some lenders offer revolving credit facilities for this use, providing businesses with a flexible way of ensuring that legal tax obligations are never a worry.
7. Miscellaneous Revolving Credit Facilities
The above is not an exhaustive list. There is a range of revolving credit products on offer to UK businesses to help manage cashflow on both short- and long-term bases. Why not speak to us at Clifton Private Finance to see what options are available to you?
How Much Could You Borrow?
Use our business loan calculator below to see what you could borrow.
How to Use a Revolving Credit Facility
Revolving credit is at its best when it is competently managed.
One of the problems with this method of providing cashflow is over-reliance. Businesses often treat a credit limit as “cash in the bank”, spending their credit almost immediately and finding themselves in a stretched financial situation.
To get the most out of a revolving credit facility, it is essential that the “dip in, dip out” aspect of the system is used appropriately and that payments are made regularly to clear or lower the amount of credit utilised. This way, interest payments are lowered and further credit is always available when it is needed.
Of course, should the need arise to stretch beyond that 30% for a short time, then the revolving credit facility exists for that exact reason, but long-term overuse of a revolving credit facility is almost always detrimental, with other financial product far better suited if a long-term repayment is needed.
Does Revolving Credit Affect Your Business Credit Rating?
Your business credit rating is significantly affected by your use of revolving credit streams. This can be both a positive and a negative aspect to revolving credit - positive if the credit is managed well, and negative if it spirals out of control.
More than any other single item, your lines of credit will cause your business credit score to rise and fall. It is for this reason that credit cards are often valuable assets in the early days of a business or one looking to grow its credit rating.
Conversely, stretching your credit or missing repayments on your credit cards will quickly damage your business credit history.
Revolving Credit vs. Business Loans
What is the best to use - a revolving line of credit or a business loan with regular monthly repayments?
The answer depends a lot on what you need the money for.
Revolving credit facilities are excellent at providing a solution to cashflow issues, offering emergency capital as and when it is needed. They allow you to take advantage of opportunities that come up, as they are pre-approved and can be used immediately.
Sometimes, it is also worth seeing if there is a “hidden” loan in the background - often using a revolving line of credit can be more beneficial.
One example of this is with vehicle insurance. A company may offer monthly repayments on your business car insurance, at a slightly higher rate than the equivalent annual premium. In the background, this is a loan that is often at a high interest rate, arranged by the insurer on your behalf. In these cases, it is often better to pay the full annual sum with a line of credit, such as a credit card, and repay the line of credit each month. Not only will this limit the number of loans listed in your name, but it will enable you to get any additional benefits offered by your credit card provider.
It is always worth speaking to a specialist - discuss your specific need with your business finance broker and we’ll be able to help you choose the product with the best fit.
Help with Revolving Credit
If your revolving credit facility is overused, the cost of the interest repayments can be considerable and limit you in obtaining further credit. In these cases, it is often prudent to consider a medium-term business loan to repay the line of credit, managed by regular monthly repayments.
Obtaining a Revolving Credit Facility with Clifton Private Finance
If you have a cashflow need for revolving credit, then we can help. At Clifton Private Finance, we have a team of experts who will consider the entire market of credit providers to help you choose one that best fits your business needs. Contact us today for more information.
To see what we can do for you, call us on0203 900 4322 or book a free consultation below.
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