®
Most business borrowing conversations start and end with the term loan: apply for a fixed amount, receive the money, repay it over a set term. But for businesses with recurring, variable cash flow needs, a term loan is often the wrong tool. A revolving credit facility — sometimes called an RCF or revolving credit line — works differently. You agree a limit with the lender, draw from it as needed, repay, and draw again. The limit stays available for as long as the facility is in place. This guide explains the mechanics, the costs, and when revolving credit makes more sense than a term loan.
How a revolving credit facility works
Imagine a pre-approved overdraft with a clear cost structure. You agree a limit — say £30,000. You draw £10,000 this week to cover payroll during a quiet patch. You repay £10,000 the following week when a client settles. Your facility is back to £30,000. Next month you draw £8,000 to cover a supplier payment. You repay. You draw again. You are charged interest or a fee only on the amount drawn, for as long as you hold it — not on the full £30,000 limit.
This is the core difference from a term loan. With a term loan, the clock starts when you draw and stops when you repay — and you repay once. With a revolving facility, you draw, repay, and draw again, potentially many times over the life of the facility. The limit refreshes as you repay.
The facility has a fixed term too — typically twelve months, sometimes shorter or longer — at which point it is either renewed or closed. During the term, you have the flexibility to use it as much or as little as the limit allows.
What does it cost?
Revolving credit facilities are priced differently from term loans, and the pricing varies by lender. Common structures include:
- Daily or monthly interest on the drawn balance. You only pay interest on what you have actually borrowed, accrued daily. If you draw £10,000 for fifteen days, you pay interest on £10,000 for fifteen days, then nothing if you repay. This is the most transparent structure for variable users.
- A flat fee per draw. Each time you draw, you pay a fixed fee regardless of the amount or how long you hold it. This can work out expensive if you make many small, short draws but predictable if you draw in larger, longer chunks.
- A combination of a commitment fee and drawn interest. A small fee on the undrawn limit (to compensate the lender for keeping the capital available) plus interest on what you draw. This is more common in larger facilities.
Before you commit, calculate the realistic cost for the pattern of use you expect. If you plan to draw £10,000 for two weeks each month, compute that cost for twelve months. If you plan occasional large draws rather than frequent small ones, price on those. The stated rate looks different depending on how you use the facility.
When revolving credit makes more sense than a term loan
A revolving credit facility is the right tool when your cash flow need is recurring but variable. The classic use cases are:
Bridging a predictable gap between costs and receipts. If you pay suppliers on 30-day terms but your clients take 45 or 60 days to pay, you have a structural cash flow gap every month. A revolving facility bridges that gap continuously without requiring you to reapply each time. A term loan handles this for one gap; an RCF handles it for twelve months.
Managing seasonal peaks in working capital. Businesses that stock up before a busy season — whether retail, hospitality, or wholesale — need capital in August that arrives back in October. A revolving facility lets you draw what you need for the stock build, repay as the season clears, and draw again for the next cycle, all within a single facility.
Buffering payroll against irregular receipts. If you have a reliable payroll but irregular client payments, a revolving facility ensures you can always meet payroll without disrupting your operations or your banking relationship. You draw when you need to, repay when the client settles.
A term loan makes more sense when the need is a single, specific purchase. Buying a piece of equipment, covering one VAT quarter, fitting out a new premises, or funding a specific stock order that has a clear repayment date — these are term loan needs. The cash goes in once, the repayment schedule is fixed, and you know the total cost upfront.
Revolving credit versus a business overdraft
These sound similar but are different. A traditional bank overdraft is available on demand, charges interest when you are in debit, and can technically be withdrawn at any time (even though banks rarely do this without notice). A revolving credit facility is a standalone product from a lender, with a written agreement that sets out the limit, the term, and the cost structure. It cannot be reduced or withdrawn without the process set out in the agreement. For a business that needs a reliable, predictable backstop, the certainty of an RCF is often preferable to an overdraft that the bank can technically call at any point.
Is a revolving credit facility right for your business?
Ask yourself three questions. First, is the need recurring? If you expect to need to draw multiple times over the next twelve months, a revolving facility is worth considering. If you need money once, a term loan is simpler and usually cheaper in total. Second, is the amount variable? If you do not know exactly how much you will need, a limit with a flexible draw is more useful than a fixed lump sum. Third, is the cash flow predictable enough to repay regularly? A revolving facility requires discipline: drawing more than you can repay quickly makes the cost accumulate.
If the answers are yes, yes, and yes, a revolving credit facility is likely the right product. If any answer is no, a term loan may serve you better. Our eligibility check takes two minutes and will tell you whether your company is likely to qualify for either product.
Frequently asked questions
- How is a revolving credit facility different from a term loan?
- A term loan provides a fixed amount that you borrow once and repay over a set schedule. A revolving credit facility provides a limit that you can draw from, repay, and draw again multiple times during the facility term. You pay only on what you have drawn, making it more flexible for businesses with recurring, variable cash needs.
- Do I pay interest on the full limit even when I have not drawn anything?
- In most revolving credit structures you only pay on the drawn balance, not the full limit. Some facilities charge a small commitment fee on the undrawn portion, but this is typically much lower than drawn interest. Always check the exact pricing structure before committing — the drawn rate and any undrawn fee should both be documented in the facility agreement.
- Can a lender withdraw a revolving credit facility early?
- A revolving credit facility from a specialist lender is governed by a written facility agreement that specifies the circumstances under which the lender can reduce or withdraw the facility. Unlike a bank overdraft, which can technically be demanded at any time, an RCF has documented grounds for termination. Read the facility agreement before you sign and understand what the early termination clauses say.
- What is the difference between a revolving credit facility and invoice finance?
- Invoice finance advances money against specific, issued invoices — you receive a percentage of the invoice value, and when your client pays the invoice, the finance is settled. A revolving credit facility is not tied to specific invoices; it is a general limit you draw from for any business purpose. Invoice finance is better suited to businesses with large, identifiable customer debts; revolving credit is better for general cash flow management.