Revolving Credit Facilities: How They Work in the UK

You get a pre-agreed credit line you can draw from, repay, and draw from again without reapplying. The limit resets as you repay, and you only pay interest on what you actually use.

Think of it as a structural feature of your cash flow, not a one-off product. We rate it the cleanest fix when the same short gap keeps reopening between money going out and money coming in.

What a Revolving Credit Facility Is

You hold a committed credit line, arranged for a fixed term of one to three years and sitting behind a formal credit agreement. That’s the key difference from an overdraft, which the bank can pull on demand.

Say you need £30,000 to cover Friday’s payroll because a big customer is paying on day 45 instead of day 30. You draw the facility, repay when the money lands, and pay interest only for the fortnight you borrowed.

You would pay far more taking the same £30,000 as a term loan, with interest on the full balance for 12 months — for what is, underneath, the same problem. We rate that gap the whole case for a revolving facility.

Why Businesses Use Them

You use a revolving facility for recurring, short-term gaps, and they don’t have to be dramatic. A business that consistently waits four to six weeks between issuing an invoice and being paid has a gap worth bridging.

The common scenes are familiar: covering your payroll the week before a large customer settles, buying stock ahead of a seasonal peak, or bridging a VAT quarter where HMRC wants paying before your debtors do.

You can also hold the facility as a buffer while a larger financing arrangement completes. We find that fine, provided the balance clears before the term expires rather than quietly becoming permanent.

How the Cost Works

You pay interest only on the drawn balance, so the cost tracks your cash flow, calculated daily and billed monthly. Bank facilities for established businesses typically run 6–12% annualised; specialist and fintech lenders run 12–25%, the price of a shorter track record.

Most facilities also carry an arrangement fee of 1–3% upfront, and many add a commitment fee — also called a non-utilisation fee — on the undrawn portion, typically 0.5–1.5% a year. We rate that fee the line most owners overlook.

Here is the maths on a £50,000 facility at 10% interest with a 1% commitment fee. Left untouched, it costs £500 a year; draw £10,000 for a full year and you add £1,000 in interest.

You would pay just £83 in interest by drawing that £10,000 for one month instead of a year, not £1,000. That pay-as-you-go pricing is the facility’s real advantage over a term loan.

The Commitment Fee Trap

You can arrange a facility, barely use it, and still pay handsomely for it. A £100,000 facility with a 1% commitment fee costs £1,000 a year even if you never draw a penny. That’s the trap.

If you only need the line twice a year for small amounts, that standing cost can wipe out the interest savings and quietly drain your cash flow. The headline rate looks competitive; the fee on fresh air does not.

The fix is simple: size the facility to what you actually draw, not the maximum you might one day need. We rate a £25,000 line used regularly as better value than a £100,000 line used twice a year.

Revolving Facility vs Overdraft

You should weigh certainty against convenience here. An overdraft is repayable on demand, so the bank can withdraw it with limited notice, often when your cash flow is already tight. A revolving facility has a committed term the lender can’t simply cancel.

Overdraft limits are often lower and the pricing is harder to model, because arrangement fees, excess fees and daily interest combine in ways you can’t easily compare. A revolving facility is usually larger, more transparent and independent of your current account.

You should pick a committed facility if you consistently need working-capital headroom; it’s almost always the better-structured product anyway. For an occasional buffer with a strong bank relationship, an overdraft can still be the cheaper call. That’s the trade-off.

Eligibility: What Lenders Look For

You’ll face a stricter test for a committed bank facility. Banks typically want two years of filed accounts, a current account with a clean history, and consistent revenue that supports the repayment pattern the facility implies. Most bank RCFs start at £25,000.

Specialist and fintech lenders are more flexible on trading history — some look at you from six months in — but they price the risk with higher rates and lower limits. They are a realistic route when your cash flow is sound but your accounts are thin.

You should expect financial covenants and usually a debenture or personal guarantee on larger facilities. We rate the covenants and the guarantee as the terms to read first, because a breach can let the lender reprice or pull the facility.

When a Term Loan Makes More Sense

You should reach for a term loan when the need is a large one-off or the balance will stay drawn. If you’re buying equipment or funding a fit-out you keep for years, a fixed-term loan at a lower rate beats revolving pricing.

Switch, too, if your facility is permanently drawn. A revolving line sitting at 90% for months is a term loan in disguise, priced too high, and it drains your cash flow at the wrong rate. We’ve seen owners pay revolving rates for years on a balance that never moves.

You should compare the all-in cost honestly: an RCF’s margin plus its commitment fee and arrangement fee, against a term loan’s APR. Match the product to how the balance behaves, and the rate looks after itself.

Revolving Credit Facility FAQs

Methodology and Disclosure