A complete guide to revolving credit facilities
In this guide, we’ll unpack what exactly a revolving credit facility is, how they compare to other debt finance products and how they can benefit businesses that are looking for a flexible cash source for their expansion stage.
Revolving credit facilities make up a key part of our business loan offering at OakNorth, as we continue to offer bespoke debt finance and support to what we refer to as the UK’s ‘missing middle’ – businesses that are the most significant contributors to economic and employment growth, yet struggle to access suitable debt finance to grow.
You may have seen the term ‘RCF’ bandied about in the financial industry without really understanding what it means, what it is, or whether it could be a viable financial option for your business.
RCF is the acronym for a revolving credit facility – also known in the lending world as a revolving credit line, revolving line of credit, revolving loans, or revolving finance. The name will change from lender to lender, but they’re all terms to describe the same specialist type of business loan.
Whatever you refer to it as, an RCF is essentially a direct line of credit that gives a borrower complete flexibility to draw upon capital, repay it back, and then draw down again continuously until the end of the agreed term and maximum credit limit.
Because the funds are replenished when paid back (aka, they revolve) the borrower can keep using it, making it different to a regular line of credit – which when the maximum credit has been reached and paid back, the loan ends.
This is incredibly convenient for a business, as it means it doesn’t have to refinance each time it needs to draw upon capital, which can be both costly and time intense.
Most RCFs are used as working capital loans – helping businesses withdraw money on an adhoc basis to release cash flow to cover the costs of stock, buy new equipment, maintain operational costs, and pay staff salaries.
When a business applies for a revolving credit line, it will agree on a funding limit with the lender. This limit is the most money the business can draw down over the full course of the term. Once this has been set, the borrower is then able to draw down partial amounts, or the full upper limit in one go. Only once the same amount has been repaid does the line of credit replenish itself, and the money can be withdrawn once again.
Revolving credit facilities are often seen as an alternative to term loans – it’s not uncommon for businesses to have a range of both, depending on their long and short term goals. The key difference between a term loan and an RCF is the repayment schedule. As mentioned, a revolving credit line gives the borrower the freedom to withdraw money then pay it back again then withdraw again in a continuous cycle – so long as the debt and interest are paid off the borrower can keep drawing down up to the maximum credit limit.
A term loan on the other hand is where a lender provides a lump sum of money upfront with agreed terms and conditions. The borrower must then pay back that sum, with the agreed added interest – either fixed or floating, over the repayment schedule. Term loans can be secured or unsecured and usually run for longer than RCFs – and if a borrower pays the debt back early, they can receive penalty fees.
RFCs are much like a business overdraft in that they’re not static business loans, but instead, sources of finance on tap to be drawn from and paid back with added interest when a business needs increased cash flow. But, although they run in a similar way, there are a few important different differences between an RCF and a business overdraft. Typically, RCFs are:
Unlike a business overdraft, a revolving credit facility is not linked to your business bank account, which means you’re not restricted by your bank’s set interest rates or terms.
Although revolving credit facilities are often used as working capital in the short term, they’re still a type of business loan, which means that a business needs to apply in advance, agreeing to the terms and conditions as well as the interest rates.
Comparatively, business overdrafts can be authorised or non-authorised – non-authorised business overdrafts are when a business spends more than they have in its account without discussing the implications first.
Many businesses now find it easier to access revolving credit facilities than they do business overdrafts, despite RCFs being a specialist loan type.
This is firstly a result of the rise in neo or challenger banks that specialise in flexible and bespoke debt finance designed with small-medium businesses in mind – and secondly because high street banks have scaled back their overdraft offerings over the past few years.
Most sole traders can have both personal and business accounts with access to overdrafts to aid with cash flow, while many revolving credit facilities are only available to limited companies.
Business overdrafts are often used in the same way as a cash advance – short term finance to see businesses through trading cycles to pay staff, and suppliers to keep operations moving. Revolving lines of credit on the other hand aren’t just taken out to keep things ticking over. They’re also used for growth opportunities to strengthen revenue and long-term success.
Business overdrafts have their limits – especially if they’re unauthorised, and banks are often unwilling to increase the upper threshold for a business that needs liquidity at pace. This is why they’re commonly used as a fallback rather than a means to scale. By contrast, an RCF is working capital that can be used for extra liquidity, or for bigger business investments such as hiring new senior staff or investing in new office space.
If you’re an entrepreneur looking to scale your business and you’re in need of added flexibility, it’s likely that an RCF could be the financial solution you’re looking for.
Not only are revolving credit lines a great choice for short-term finance, or to have in place as a contingency plan should business trading be impacted, but they’re flexible, fast, and designed to support a business as it grows. Some key benefits of RCFs are:
There may be times when you don’t need to draw down on your revolving credit at all, or others when you draw down and pay back multiple times in a month. Whatever you choose, the control is in your hands. And best of all, when you’re not using your finance, you won’t pay any interest on it.
You may need to release cash flow to manage unpredictable trading periods, seasonality or expansions and growth plans – whatever you need working capital for, an RCF is there when you need it, on your terms. And if you’re growing faster than planned, your revolving credit could grow with you – if you can repay your debt timely and consistently, there’s a strong chance, you’ll be able to increase your maximum limit, without refinancing.
Because you pay back to replenish your funds there are no early repayment fees with an RCF.
Even if you agree to a large credit limit, you’ll only pay interest on the amounts you have drawn, not the total amount lent.
Applications for revolving lines of credit are usually quicker than more traditional business loans, however, it’s likely lenders will still need to go through a legal process and all conditions before funds can be drawn.
Rather than refinancing every time you need additional funds, simply dip back into your revolving credit loan without the additional paperwork or admin.
RCFs are great short terms solutions, designed to flex with a business’ needs. You can take them out and repay them as soon as you wish. Their flexibility however does make them a bit more expensive than fixed term business loans.
Not sure if an RCF is what you need? We’ve got a range of specialist business loans to suit your sector, ambition and business growth. We’ve supported management buyouts, strategic acquisitions, expansions, developments, and much more. So if you’re looking for a financing partner that’s excited by your aspirations, see how we can work together.
Since revolving credit lines are a more flexible source of finance, they usually come with a higher price tag than more traditional loan packages.
Most lenders, including us, will ask you to provide a personal guarantor when you take out a revolving line of credit. This means that if you’re unable to make the repayments, this person is legally liable for paying off the remaining owed debt.
Because of their fluidity and the nature of the repayment cycle, the credit amount you can get is usually lower than a fixed term loan or a commercial mortgage.
Interest rates for RCFs will vary depending on the lender, the amount, and the risk associated with the debt being provided. The associated interest rates can be either fixed or floating – at OakNorth, we offer floating rates across all our revolving credit lines. And as they’re usually paid off monthly or quarterly, businesses can manage their cash flow forecasting. If an RCF is not drawn down, then the borrower will not pay any interest on it.
Lenders will typically decide in advance the maximum credit limit – usually, this will be equivalent to one month of the business’ turnover. At OakNorth however, we understand that RCFs are designed to adapt to a business, and therefore need to be tailored specifically to their needs. This means that we take a unique approach to RCFs – customising them directly to the unique needs of each borrower so that it’s a reliable source of finance throughout the agreed time.
We’ve completed many RCF transactions over the years, supplying capital to growing businesses across the UK who are looking to scale.
In September 2019, we provided a £20m RCF to RAW Mortgage Fund, a specialist fund providing buy-to-let property loans against residential real estate in the UK. Founded in May 2015, the fund is run by RAW Capital Partners, the Guernsey-based innovative asset management company.
In early 2021, we were able to increase this existing facility by a further £20m, taking the total liquidity line to £40m. Benefitting from the increase to its RCF, RAW Mortgage Fund is currently using the facility from us to lend ahead of investor subscription and keep headroom for potential redemptions.
Tim Parkes, Managing Director and Lead Fund Manager, RAW Mortgage Fund, commented on the transaction saying:
“Throughout 2019 and 2020, we made several key hires, including a Head of Distribution, Head of Operations, and a CFO – considerably increasing the size and experience of our senior team. In addition to this, we’ve continued to invest in process automation, adding new functionality that’s helped us maintain our speed and efficiency as we’ve scaled.
We will continue to scale our team and processes in line with the envisaged growth of the Fund and are grateful for OakNorth Bank’s continued support. Since we completed the initial part of this transaction together, Mo and the team have done several funds finance deals, so their depth and breadth of expertise in this space continues to grow.”
The criteria for revolving lines of credit differ from lender to lender. However, all lenders will be looking at the following to assess whether a business is able to take on an RCF, as well as the maximum credit limit:
Our revolving credit puts businesses back in control of their future. Whether it’s to free up cash flow for stock, supplies and salaries, or you’re looking to branch out into new territory, we’ve got the finance to help you succeed. But most importantly, our lending experts understand your sector, so we don’t offer off the shelf solutions. If you’re ready for fast flexible finance get in touch today.