What Is a Revolving Credit Facility?
A revolving credit facility (RCF) is a flexible form of business finance that works similarly to an overdraft. The lender agrees an overall limit - say, £150,000 - and the business can draw any amount up to that limit at any time, repay it, and draw again within the facility term. Unlike a term loan (where a lump sum is drawn and repaid on a fixed schedule), an RCF is designed to be drawn and repaid multiple times across its life.
The defining feature of an RCF that distinguishes it from a bank overdraft is certainty. A bank overdraft is repayable on demand - the bank can reduce or cancel it at any time with limited notice. An RCF has a fixed term (typically 12-36 months) during which the agreed limit is contractually guaranteed. The business knows its working capital headroom for the duration of the term and can plan accordingly.
How an RCF Works in Practice
When the facility is set up, the lender agrees the limit and term. The business draws funds as needed - often by transfer from a linked facility account to the trading account - and repays them when cash arrives. Throughout the term, the business can draw and repay as many times as needed, provided the outstanding balance does not exceed the agreed limit at any time.
Interest is calculated daily on the drawn balance and charged monthly. If the business draws £50,000 from a £150,000 facility for 15 days, it pays interest on £50,000 for 15 days - not on the full £150,000. The undrawn portion (£100,000 in this example) may carry a small commitment fee, typically 0.5-1.5% per annum of the undrawn amount.
Use our working capital calculator at /working-capital-calculator to estimate how much headroom your business should have available before approaching lenders.
When to Draw and When to Repay
The revolving credit facility works most efficiently when it is used as a bridge between cash going out and cash coming in - drawn for a defined period and repaid as soon as the business's own cash flow permits. Common draw occasions include: wages due before a large customer payment arrives; supplier invoices due before a seasonal peak generates the cash to pay them; a VAT payment due at an inconvenient point in the cash cycle; and emergency working capital for a specific, short-term gap.
The facility should not be treated as a permanent debt to be maintained at a high utilisation level - that is a sign that the underlying working capital problem is structural and requires a different solution (invoice finance, increased equity, or a longer-term loan). The ideal pattern is: draw as needed, repay quickly, draw again as needed - the balance fluctuating up and down rather than rising progressively.
RCF vs Business Overdraft
The key practical differences between an RCF and a traditional bank overdraft are: an RCF cannot be reduced during its term (an overdraft can be cancelled at any time); an RCF is available from specialist lenders without requiring a change of banking provider; RCF limits from specialist lenders are typically higher than equivalent bank overdraft offers; and the rate on a specialist RCF is often comparable to or lower than a bank overdraft for the same business profile.
For businesses that have been refused an overdraft or offered a low limit, a specialist RCF is the direct replacement.
Eligibility for a Revolving Credit Facility
Most specialist RCF lenders require the following criteria before approving a facility.
Adverse director credit can be accommodated by some specialist lenders, particularly where there is property security or the adverse event is historic and resolved. The limit available typically reflects 1-3 months of average monthly revenue - so a business with £500,000 annual turnover might access an RCF of £40,000-£125,000.
- Minimum 12 months of trading history (some accept 6 months)
- Minimum annual turnover of £100,000-£250,000 depending on the requested limit
- A business credit profile without active insolvency proceedings
- Director credit profiles without undischarged bankruptcy
- A demonstrable need for the facility based on cash flow patterns
- A personal guarantee from the principal directors
How to Use an RCF Effectively
There are three principles of effective RCF management. First, draw with a repayment date in mind. Before drawing, identify when the cash will arrive that enables repayment - the customer payment date, the sales receipt, the contract milestone. Drawing without a clear repayment trigger leads to creeping balances and unnecessary interest cost.
Second, repay as soon as possible. Because interest accrues daily on the drawn balance, every day the balance is held costs money. Repay the moment the cash arrives, even if drawing again shortly afterwards.
Third, review the limit annually. As the business grows, the working capital requirement grows with it. Request a limit review annually - most lenders will increase limits for businesses demonstrating healthy usage patterns and growing revenue.