A revolving credit facility (RCF) is a way to generate working capital for your business. It’s the old way of establishing cash flow for a business that may not have a great deal of cash to hand for various reasons. Similar to an overdraft, a RCF has pre-approved limits and usually requires a personal guarantee or security.
The key aspect of an RCF is its flexibility. You can borrow capital, repay it, then borrow it again with virtually no hurdles. It often doesn’t matter if you have a limited or less than perfect credit history thanks to the personal guarantee aspect of the product. However, the RCFs haven't been updated for modern purchasing behaviours.
RCFs are difficult to visualise, so we’ve broken it down into a few easy steps:
• Company X engages a revolving credit facility with an upper limit of $10,000
• Company X uses $8000 to purchase a new location thanks to increased demand for product
• Now only $2000 of credit can be used by Company X as any more would take them over the credit limit
• $8000 plus the agreed interest rate is repaid across 3 months - the interest is only repaid on the $8000
• 3 months later, with the credit paid off, Company X can use $10,000 of credit again
Using a revolving credit facility can be tricky for some businesses. The lender hands businesses a credit limit, the maximum amount that can be spent at any one time, but the business can decide how much it wants to borrow and repay each month. So long as the spending is within that upper limit of credit then there’s no issue for concern. However, this means that a lot of information and nuance is lost.
RCFs lack a card, funds are simply transferred into your business current bank account to be used with little to no trackability on the debt incurred and how much needs to be repaid. Prior to Open Banking capabilities this also meant that businesses had no real way to measure the impact of the credit they were taking on and assessing whether or not it moved the needle on company goals without superior accounting skills.
It also means that RCF providers are unable to demonstrate to their clients where further credit may be useful or if clients need to pull back on credit usage. Useful business information was lost. This lack of information on both sides of the relationship is why RCF providers require a personal guarantee from borrowers.
Open Banking access to business data means that new credit providers are able to respond to businesses with real-time information on their finances and allows small to medium businesses (SMBs) to adjust their credit exposure as they like. It’s credit configured to SMB needs.
It’s relatively easy to become eligible for an RCF, but the size of the facility is what really matters for most businesses. Eligibility is dependent on the personal guarantee of a company director and the financial health of the company itself.
There are inherent risks to this, the company director’s personal guarantee means that they could be liable for the credit should the business be able to make repayments. Depending on the confidence the lender has in the business there may also be a fee to use the facility, essentially a sign-up cost and thanks to the RCF’s flexibility there is a strong likelihood that there will be higher fees in general than a standard fixed-term loan from a bank.
Eligibility for an RCF is predicated on the cash flow of the business that’s applying. So for a business that’s been trading for more than 3 month it means that they can quickly grab onto credit to build out their presence.
Revolving credit facilities do not equal endless credit. They are often limited to 2 years but will usually be available for renewal if the relationship is positive. The credit limitation is also subject to change, lenders will normally offer a month’s revenue in credit to a business but if the business is excelling or it’s a long-standing relationship then a limit increase may be offered.
Thanks to being such a short-term credit product, RCFs are useful for a business to build its credit history quickly and they assist businesses which would not be eligible for other more long-term credit products.
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