Revolving credit facility: how it works and what it costs

How a revolving credit facility works

The lender agrees a limit, say £250,000, for a set period written into the facility agreement. During that period you can draw any amount up to the limit by giving notice, repay it when cash comes in and draw it again later. Each drawing is called a utilisation. Interest runs only on the money drawn, for as long as it is drawn.

The facility sits alongside your bank account. It is a separate loan account that you draw from into your current account when you need cash, and pay back into when you have it. Some agreements set a minimum drawing, a minimum period for each drawing or a maximum number of drawings at once. Those clauses decide how flexible the facility is from one week to the next.

The point of the structure is commitment. Once the agreement is signed, the lender has promised to lend up to the limit until the end date, as long as you meet the conditions. That promise is what you pay the fee on undrawn money for. An overdraft gives you a limit too, but the bank can ask for it back at any time.

Revolving credit is used by businesses whose cash needs swing during the year: buying stock before a peak season, paying a large supplier before a contract pays out, covering the months between a big order and the customer’s payment. It is a poor fit for a permanent shortfall. If the facility is fully drawn from the first day to the last, the business needs a term loan or more equity.

The terms in a facility agreement

Limit or commitment: The most you can have drawn at any one time. It can step down over the term if the agreement says so.
Margin: The interest rate on drawn money, written as a percentage over a reference rate such as the Bank of England base rate.
Non-utilisation fee: A fee on the undrawn part of the limit, charged for keeping the money available to you. Some lenders call it a commitment fee.
Arrangement fee: A one-off fee for setting the facility up, charged on the limit and deducted from the first drawing or paid at signing.
Covenants: Financial tests you must keep to, such as a ratio of debt to profit or a minimum level of interest cover, checked against your accounts each quarter or each year.
Clean-down: A requirement to bring the balance to nil for a set number of days each year, to show the facility is funding a swing in trade.
Termination date: The day the facility ends and everything drawn must be repaid, unless it has been renewed or refinanced first.

What a facility costs over a year

Illustrative example

A £250,000 facility with an average of £150,000 drawn across the year. Every rate here is an assumption for the arithmetic: lenders set their own.

Interest on £150,000 drawn, at an assumed 10% a year: £15,000
Non-utilisation fee on £100,000 undrawn, at an assumed 1% a year: £1,000
Arrangement fee at an assumed 1% of the £250,000 limit: £2,500
Cost for the year: £18,500

That is 12.3% of the average amount drawn. Compare facilities on this total for your own pattern of drawings, using the margin, the fee on undrawn money and the arrangement fee together. A lower margin with a higher fee on undrawn money can cost more if you draw little of the limit.

Revolving credit facility, overdraft and term loan

	Revolving credit facility	Overdraft	Term loan
Can the lender withdraw it?	Only on an event of default set out in the agreement	Repayable on demand under the bank’s terms	Only on an event of default
How you draw it	Notice to the lender for each drawing	Automatic as the account goes overdrawn	One drawing at the start
Repayment	Whenever you choose within the term, all by the end date	From money paid into the account	Fixed instalments
Interest	On drawn money, plus a fee on undrawn money	On the daily overdrawn balance	On the outstanding balance
Fits	Swings that recur across the year	Short, small dips in the account	A purchase that pays back over years

Revolving credit sits between the other two. It gives the freedom of an overdraft with the commitment of a loan, and costs more to arrange than either because the agreement is longer and the lender is holding the limit for you. See the overdraft page for how a bank reviews and withdraws an overdraft.

A baker taking a tray of fresh bread from a rack

What happens at renewal

A facility has an end date, and on that date everything drawn falls due. Lenders start the renewal conversation some months before. They ask for up-to-date accounts, a forecast and the covenant figures, and then offer to renew on the same terms, renew with a smaller limit or different pricing, or let the facility run to its end.

Start that conversation early yourself. If the lender is not going to renew, you need time to find a replacement, and refinancing a working capital facility means a new lender reading your accounts, your debtor list and your forecast from the start. A funding search through Swoop can run alongside your existing lender’s review.

A lender can end the facility before the end date only if you breach the agreement: missing a payment, failing a covenant test, giving wrong information or becoming insolvent. A covenant breach does not mean the money is called in straight away. Lenders can waive the breach, reset the covenant for a fee or a higher margin, or reserve their rights while you agree a plan. Tell the lender as soon as your management accounts show a test will be missed.

Who it suits

Revolving credit suits an established limited company with a few years of accounts, a steady profit and a cash need that rises and falls in a pattern you can show on a forecast. Wholesalers, manufacturers, contractors with stage payments and seasonal retailers are the kind of businesses that use it, because their need for cash peaks at known points.

Lenders look at your profit before interest, tax, depreciation and amortisation, the debt you already carry, and how the facility will be repaid if trading turns down. Larger facilities are secured by a debenture over the company’s assets, and some lenders ask for a personal guarantee from directors as well.

It suits a business less well if its cash need is driven by debtors alone. If the gap is unpaid invoices, invoice finance lends against those invoices and grows with your sales, where a revolving credit limit stays fixed until renewal. If the gap is a single tax bill, a VAT loan or corporation tax loan is simpler.

The funding search is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000.

Questions people ask

What is the difference between a revolving credit facility and an overdraft?

Both let you borrow up to a limit and repay as cash comes in. The difference is commitment. An overdraft is repayable on demand under the bank’s terms and is reviewed each year. A revolving credit facility is committed for a fixed term, and the lender can end it early only if you breach the agreement. You pay for that commitment through a fee on the undrawn part of the limit and a larger arrangement fee.

Do I pay interest on the whole limit?

You pay interest only on the amount drawn, for the days it is drawn. On the undrawn part of the limit you pay a non-utilisation fee, which is a smaller percentage. The arrangement fee is charged on the whole limit once, at the start. Ask each lender for all three figures and work out the yearly cost for your expected pattern of drawings.

Can a revolving credit facility be secured?

Yes. Smaller facilities may be unsecured, but larger ones are secured by a debenture giving the lender a fixed and floating charge over the company’s assets, and the charge is registered at Companies House. Lenders may also ask directors for personal guarantees. The security and the guarantees are part of the offer and can be negotiated before you sign.

What happens if I breach a covenant?

A breach gives the lender the right to act, which may include ending the facility and demanding repayment. In practice lenders choose between waiving the breach, resetting the covenant, raising the margin or charging a fee. Telling the lender early, with a forecast and a plan, gives you more room than letting them find the breach in your quarterly figures.

How long does a revolving credit facility last?

The term is set in the agreement and differs between lenders and facility sizes. At the end date the whole drawn balance falls due unless the facility is renewed or refinanced. Plan the renewal several months ahead, with up-to-date accounts and a forecast ready, so that a refusal leaves time to arrange a replacement.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Revolving credit facility

How a revolving credit facility works

The terms in a facility agreement

What a facility costs over a year

Revolving credit facility, overdraft and term loan

What happens at renewal

Who it suits

Questions people ask

Working capital

Business overdraft

Invoice finance

Working capital finance

Business loans

Revolving credit facility

How a revolving credit facility works

The terms in a facility agreement

What a facility costs over a year

Revolving credit facility, overdraft and term loan

What happens at renewal

Who it suits

Questions people ask

Working capital

Business overdraft

Invoice finance

Working capital finance

Business loans

Start a funding search

Cover for a personal guarantee