This flexible form of financing allows borrowers to access funds as needed. That makes a revolving loan facility a good option for businesses that have ongoing working capital needs. Learn more about how revolving loan facilities work and what alternatives you might have.
Definition and Example of a Revolving Loan Facility
A revolving loan facility is a type of credit issued by a financial company to, in most cases, a business. It comes with a maximum loan amount borrowers can draw from as needed. A revolving loan facility is commonly used to meet recurring business obligations. That’s because businesses often have ongoing operations expenses but inconsistent cash flow For example, payroll is one of the largest costs a company has every month. And it’s an expense that businesses can’t afford to miss out on due to poor cash flow. The company can use a revolving credit facility to meet its payroll expenses. From there, it can repay the funds once its accounts-receivable payments come in.
How a Revolving Loan Facility Works
A revolving loan facility is a variable line of credit generally used by businesses. It’s a flexible form of credit that allows borrowers to withdraw funds on an as-needed basis. A revolving loan facility may have multiple terms and limits within its lifespan, and may cap the number of outstanding balances you have at any one time. Because of this, a revolving loan facility may come with higher interest rates than what you’d receive on a fixed-rate loan. A revolving loan facility is a popular option for businesses because it can help with cash flow problems. The company will often draw funds to cover a working capital need. It’s beneficial during times of the year when businesses experience inconsistent revenue. For example, a business might use a revolving loan facility to cover payroll or other operating expenses during a slow season. When the company receives payment from its client or customers, it can repay the loan. Revolving loan facilities tend to contain various terms and conditions specific to a business, so it’s important for businesses to understand what those requirements are and what happens if, for example, they can’t make a payment.
Alternatives to a Revolving Loan Facility
A revolving loan facility is a popular option for businesses and consumers because of its flexibility. But if you can’t get approved for one, here are some alternatives you can consider.
Invoice Financing
If your business frequently deals with clients who pay slowly or are often late, then invoice financing may be an option for you. Invoice financing lets you receive an advance on your company’s outstanding invoices. This can help free up cash in your business. And unlike invoice factoring, your clients will continue to direct their payments to your business. That way, you remain in control of the relationship with your client.
Merchant Cash Advance (MCA)
If you take out a merchant cash advance (MCA), your business receives a one-time cash advance. From there, you’ll repay the advance from a percentage of your daily credit card sales. The advantage of an MCA is that you can apply for and receive the funds fairly quickly. Since repayment is based on your daily sales, your payments will go down if your company experiences a dip in revenue. MCAs are easier to qualify for than traditional loans, but they come with high fees. This financing option is typically used by companies that need immediate access to cash. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
