Revolving credit facilities: draw what you need, repay, draw again

A revolving credit facility gives your limited company a credit limit it can draw from, repay and draw from again. You pay interest on the money you've actually drawn, for the days you've had it, not on the whole limit. It suits recurring, uneven cash gaps better than almost anything else, as long as it's kept for gaps and not quietly turned into long-term borrowing.

How it works

The British Business Bank describes revolving credit as a flexible option that lets a business withdraw funds when needed and, once repaid, use them again. It says repayments are usually daily, weekly or monthly and that facilities tend to run from 3 months to 2 years, sometimes with the option to extend.

In practice:

1. A funder agrees a limit, say £100,000.
2. You draw £30,000 for a stock order. Interest runs on £30,000.
3. You repay it as customers pay you. The £30,000 becomes available again.
4. You draw again when the next gap arrives.

The same guide notes that revolving credit is usually only available to limited companies, which is one reason it suits the companies Ask Sterling works with.

How the cost works

You'll usually see three parts:

• Interest on the drawn balance, expressed as a rate.
• An arrangement or set-up fee, sometimes taken from the first drawdown.
• Other fees: renewal fees, a non-utilisation fee on the undrawn part, or late payment charges.

Worked example. If you drew the full £100,000 at 18% APR and repaid it in equal monthly instalments over 24 months, you'd pay £4,992.41 a month, £119,817.84 in total, so £19,817.84 in interest. That's exactly what a term loan at the same rate would cost.

The difference is what happens when you don't need it all. Draw £30,000 instead of £100,000 and the interest is charged on £30,000. Repay early and you stop paying for it. With a loan you'd pay interest on the full £100,000 from day one, whether the money sat in the bank or not.

Use the loan repayment calculator to see the instalments for any amount you expect to draw. Fees taken at the start raise the real cost, so run the final offer through the offer checker too.

Sterling's take: the cheapest pound on a revolving facility is the one you don't draw. Keep the limit as headroom, not as a target.

Who it suits

• Companies with repeating, uneven gaps: seasonal stock, project-based work, lumpy supplier payments.
• Businesses that want a buffer in place before they need it, rather than applying in a hurry.
• Limited companies with a clean record at Companies House and bank statements that show money coming back in regularly.

Who it doesn't suit

• A one-off purchase you'll pay off over years. A business loan or asset finance usually fits better.
• Companies whose facility is always fully drawn. If the balance never comes down, it's a long-term loan at short-term prices.
• Businesses whose income arrives as unpaid invoices. Invoice finance ties the limit to the invoices themselves.

What funders look at

• Bank statements. Turnover, average balances, how often you're overdrawn, and whether existing finance debits are being met.
• Companies House filings. Trading history, filed accounts on time, directors, and charges already registered against the company.
• CCJs and defaults against the company or its directors.
• Personal guarantees. The British Business Bank notes you may need to give one, which makes you personally liable if the business can't repay.
• Debentures. Larger facilities may be secured by a charge over the company's assets.
• HMRC position, including any VAT or PAYE arrears.

Using a facility well

• Draw for a reason, repay from a source. Every drawdown should have a named use and a named way back: an invoice due, a seasonal peak, a VAT refund.
• Watch the balance month to month. If the low point keeps rising, part of the facility has become permanent borrowing. Move that part onto a loan with a fixed end date.
• Keep headroom. A facility that's fully drawn gives you no cover for the next surprise, which defeats the point of having one.
• Diary the renewal. Funders review facilities at renewal. Up-to-date Companies House filings and tidy bank statements make that review a formality rather than a negotiation.

Sterling's take: treat the limit like a fire extinguisher. It's there for when you need it, and you should know exactly how it gets refilled.

Red flags

• A non-utilisation fee high enough that holding the facility unused costs real money.
• A facility that can be withdrawn or reduced at short notice, with no notice period in the agreement.
• Fees on every drawdown, which make small, frequent draws expensive.
• Being encouraged to draw the full limit "while it's available".
• Interest stated per month or per day without an annual figure. Convert it before comparing.

Revolving credit vs the alternatives

The British Business Bank notes that overdraft rates are typically higher than business loan rates and that some overdrafts are repayable whenever the bank asks. A revolving facility from a specialist funder trades that recall risk for set terms; compare the price of both.