What a Revolving Credit Facility Is
A revolving credit facility is a pre-agreed credit line you can draw from, repay, and draw from again without reapplying each time. The limit resets as you repay. You only pay interest on what you actually use, and when you draw nothing, it costs you nothing — beyond any commitment fee on the undrawn portion.
Think of it as a structural feature of your finances rather than a one-off product. Picture a business that needs £30,000 to cover Friday’s payroll because a big customer is paying on day 45 instead of day 30, repays the lot when the receivable lands, then needs the same headroom three months later. That is the textbook revolving credit user.
The same business taking out a £30,000 term loan and paying interest on the full balance for 12 months pays significantly more for what is, underneath, the same problem.
The key distinction from an overdraft: revolving facilities are typically arranged for a fixed term of one to three years, sit behind a formal credit agreement, and usually offer higher limits and more transparent pricing. The flexibility looks similar on the surface; the structure and the certainty are materially different.
Why Businesses Use Them
Revolving facilities exist to solve recurring, short-term cashflow gaps. The gaps do not have to be large or dramatic. A business that consistently waits four to six weeks between issuing an invoice and seeing the money arrive has a structural working capital need — and a revolving facility addresses that need more cheaply than repeatedly drawing and repaying short-term loans.
The common scenes: covering payroll the week before a large customer settles, buying stock ahead of a seasonal peak, bridging a VAT quarter where HMRC wants paying before your debtors do, and funding a short production cycle while you wait for the customer payment to clear.
Less common but legitimate: holding the facility as a buffer while a larger financing arrangement completes. Provided the balance clears before the term expires, that is a rational use.
How the Cost Works
Interest is charged only on the drawn balance, calculated daily, billed monthly. Rates vary widely. Bank facilities for established businesses typically run at 6–12% annualised. Specialist and fintech lenders run at 12–25% for shorter-tenured or higher-risk borrowers.
Most facilities also carry an arrangement fee of 1–3% upfront, and some carry a commitment fee (also called a non-utilisation fee) on the undrawn portion, typically 0.5–1.5% annualised. If you rarely draw, that commitment fee can quietly push the effective cost above what the headline rate suggests.
Worked example. A £50,000 facility at 10% interest with a 1% commitment fee on the undrawn balance costs around £500 a year if left untouched, plus £1,000 for every £10,000 drawn for a full 12 months.
Draw £10,000 for one month and the cost is roughly £83 in interest — not £1,000. That pay-as-you-go pricing is the product’s primary advantage over a term loan.
The Commitment Fee Trap
Businesses that arrange a revolving facility and then barely use it can end up paying more than they bargained for. A £100,000 facility with a 1% commitment fee on the undrawn balance costs £1,000 a year even if you never draw a penny.
If you only need the facility twice a year for small amounts, that standing cost can wipe out the interest savings versus alternative products.
The fix is straightforward: size the facility to what you actually use, not to the maximum you might one day need. A £25,000 facility used regularly is more economical than a £100,000 facility used occasionally. Most lenders will lift the limit later if the need genuinely grows — so start tight.
Revolving Facility vs Overdraft
An overdraft is repayable on demand. The bank can withdraw it with limited notice, which is fine until the day it isn’t. A revolving credit facility has a committed term — typically one to three years — during which the lender cannot unilaterally pull the rug, provided you meet your obligations. That certainty has real planning value, and for most businesses with recurring working capital gaps, it tips the decision firmly towards an RCF.
Overdraft limits are often lower, the pricing is less transparent (arrangement fees, excess fees, and daily interest combine in ways that are hard to model), and the product is usually tied to your current account. A revolving credit facility can be arranged with a separate lender, which preserves optionality if your bank relationship sours.
For a business that consistently needs working capital headroom, a revolving facility is almost always the better-structured product. For a business that needs an occasional buffer and has a strong relationship with its bank, an overdraft may be simpler to obtain and sufficient for the purpose. Don’t over-engineer it.
Eligibility: What Lenders Look For
Banks typically want two years of filed accounts, a current account with a reasonable credit history, and consistent revenue that supports the repayment pattern implied by the facility. Most bank RCFs start at £25,000 and are aimed at limited companies and partnerships.
Specialist lenders and fintech providers are more flexible on trading history — some will look at you from six months in — but they price the risk: higher rates, lower limits. They are a realistic route for businesses that cannot yet access bank-priced revolving credit.
Lenders assess the facility against your actual cashflow cycle, not a single creditworthiness score. They want to see that the gaps you are bridging are real, recurring, and predictable — not a symptom of structural trading losses dressed up as a timing issue.
When a Term Loan Makes More Sense
A revolving facility is built for short, recurring gaps. If the need is a single, larger capital requirement — buying a piece of equipment, funding a fit-out, stocking up for a one-off contract — a term loan is usually cheaper. You draw it once, repay it on a schedule, and you pay nothing for unused capacity.
If you find yourself drawing repeatedly on a revolving facility and rarely repaying it, the facility is functioning as a term loan but priced as revolving credit. That is worth a hard look. Converting the outstanding balance into a term loan at a lower rate will often save you real money.
What to Do Next
Start with your existing bank. If you have a current account there and two years of trading history, an initial conversation costs nothing and may produce an offer faster than going to market.
If you are declined, or the limit you are offered is too low, specialist lenders including Allica Bank, iwoca, and Funding Circle offer revolving products at different price points. Get two quotes before you commit — rates between specialists vary more than you would expect.
Our revolving credit vs overdraft comparison covers the decision in more detail. If your gaps are tied to specific invoices rather than general cashflow, invoice finance may be a better fit at a comparable or lower cost.
How We Checked This
Rate ranges and product structures reflect current UK bank and specialist lender offerings as of April 2026, including Barclays, HSBC, Allica Bank, and iwoca. Commitment fee structures verified from published product terms. Specific rates depend on trading history, credit profile, and lender — verify directly before applying.