Revolving Credit Facility Explained

You get a pre-agreed credit limit you can draw from, repay, and draw from again without reapplying. The limit resets as you repay, and interest accrues only on the balance you have actually drawn.

You should reach for it on a recurring short-term gap, and we rate it the cleanest answer. For a deeper look at the economics and the commitment-fee trap, see our revolving credit facilities guide.

What a Revolving Credit Facility Is

You hold a credit line that behaves a little like a credit card, but the similarity ends there. Business revolving facilities run from £10,000 to several million, sit on formal credit agreements, and price well below consumer rates.

The defining feature is the revolving structure, so you are not taking out a new loan each time you need cash. The facility is already in place: you draw when the Tuesday payroll run lands, repay when a customer settles a fortnight later, and the headroom comes straight back.

How It Differs from a Term Loan

You take a term loan as a lump sum on day one, and interest starts accruing on the full balance immediately. You repay on a fixed schedule over a set period, and the facility closes when you’re done.

A revolving facility gives you a ceiling instead of a lump sum. You draw what you need when you need it and repay when cash comes in, with interest only on what’s outstanding.

You feel the difference on a short, recurring gap, where a revolving facility is almost always cheaper. A £30,000 need for six weeks costs six weeks of interest; the same sum as a term loan accrues interest all term, even while idle. It saves you money.

What Revolving Facilities Are Used For

You use a revolving facility for recurring, short-term working capital. The most common job is bridging the gap between issuing an invoice and being paid, which keeps your cash flow steady when customers run to 60-day terms.

Buying seasonal stock ahead of a sales peak is another, and so is the awkward mismatch when your VAT quarter falls due before the customer payments land. We find these recurring gaps are exactly what the product is built for.

You can also hold one as a standby buffer — a facility in place but rarely drawn, used only when an unexpected supplier invoice lands or a receivable slips by a fortnight. What it’s not for is a large one-off cost that stays outstanding for years.

How the Cost Works

You pay interest only on the drawn balance, charged daily and billed monthly. Bank facilities for established businesses typically run 6–12% annualised; fintech and specialist lenders sit at 12–25% for a shorter trading history.

You also meet two fees. Most facilities carry an arrangement fee of 1–3% of the limit upfront, and many add a commitment fee of 0.5–1.5% a year on the undrawn portion. We rate that commitment fee the line to size carefully, because you pay it on headroom you never touch.

Eligibility: What Lenders Look For

You’ll face a stricter test from a bank. Banks usually want two years of filed accounts, a business current account with a clean history, and revenue that supports the repayment pattern the facility implies.

Specialist and fintech lenders are more flexible, lending from six months’ trading on your cash flow rather than long accounts, but they price the risk with higher rates. Larger facilities also come with covenants and usually a personal guarantee, so read that before you sign.

Revolving Facility vs Overdraft

You should know which one you hold, because they behave differently when you need them. An overdraft is repayable on demand, so the bank can reduce or withdraw it at short notice; a revolving facility has a committed term it can’t simply pull. An overdraft can’t promise that.

You can plan on that certainty. A committed facility gives you guaranteed headroom for your cash flow, while an overdraft can vanish exactly when trading tightens. We rate that certainty the main reason to choose one. See our revolving credit vs overdraft comparison for the full picture.

When to Use a Term Loan Instead

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

You should also switch if your facility is permanently drawn. A revolving line sitting near its limit for months is a term loan in disguise, priced too high, and it quietly drains your cash flow. Match the product to how the balance behaves.

Revolving Credit Facility FAQs

Methodology and Disclosure