The fourth in our series of five working capital guides will be answering the question: “What is a revolving credit facility?”.
Revolving credit facilities are a great alternative to a traditional overdraft provided by the high street banks. The funder agrees a line of credit with the business which can be drawn down and repaid during the agreed term.
Interest is often charged for the funds drawn, for the time they are drawn and dependant on the lender there is little to no charge for funds which aren’t drawn. When you combine that with often no set-up fee involved, this type of facility is often chosen as a ‘rainy day fund’.
How does a revolving credit facility work?
Revolving credit facilities are exactly that, they revolve. As apposed to a fixed business loan which runs for a term of say 3-5 years, a revolving facility is often a rolling agreement with the initial term either 12 or 24 months, with some facilities being structured on an ongoing rolling basis similar to that of a credit card.
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