Revolving Credit Facilities: An Alternative to Business Overdrafts

A Revolving Credit Facility (RCF) is a flexible form of business finance that allows a company to borrow up to an agreed credit limit, repay what it uses and draw on the available funds again.

Unlike a traditional business loan, where the full amount is paid upfront, an RCF lets you access funding as and when your business needs it. Interest is generally charged on the amount drawn, rather than the full credit limit, although arrangement, commitment and other fees may also apply.

Revolving credit is primarily designed for short-term working capital needs, particularly where cash flow fluctuates or funding gaps occur regularly.

The lender sets the credit limit following an assessment of the business’s financial position and ability to repay. Depending on the facility, security or a personal guarantee may also be required. Eligibility varies between lenders, with many facilities aimed at established limited companies.

 

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Why Would a Business Use a Revolving Credit Facility?

The main purpose of a Revolving Credit Facility is to manage the timing difference between money going out of a business and money coming in. Supplier invoices, wages and tax payments may fall due before customers settle their own accounts.

A RCF can provide access to working capital in situations such as:

• Stock & Supplier Payments: Funding stock purchases or deposits ahead of expected sales.
• Cash Flow Gaps: Covering operating costs while waiting for customer invoices to be paid.
• Seasonal Demand: Paying for additional stock or staffing ahead of a busy trading period.
• Contract Costs: Meeting material, labour and delivery costs before receiving payment from a client.
• Unexpected Expenses: Managing an unplanned repair or business cost without immediately using cash reserves.

Where the main issue is unpaid customer invoices, invoice finance may be a more suitable option. A RCF is generally better suited to businesses with recurring or less predictable short-term funding requirements.

How Does a Revolving Credit Facility Work?

A Revolving Credit Facility operates through a simple cycle: draw, repay and reuse. The lender agrees to a maximum limit, and the business can access funds within that limit, subject to the facility’s terms.

For example, if a business has a £50,000 facility and borrows £20,000, it has £30,000 left to use. If it repays £15,000, that amount becomes available again, leaving £45,000 available to borrow.

Interest is usually charged on the amount still owed (£5,000), not the full £50,000 limit. Repaying the loan makes more credit available, but paying interest and fees does not.

The rules can vary between lenders. Some let businesses withdraw money whenever they need it, while others may require approval first.

What are the Benefits of a Revolving Credit Facility?

The main appeal of an RCF is flexibility. Having an agreed credit limit in place can give a business access to funding without needing to arrange a new loan every time a short-term cash flow gap arises.

Other potential benefits include:

• Reusable Funding: Repaying the principal makes that credit available again, while the facility remains open.
• Interest Linked to Usage: Interest is generally charged on the amount borrowed, rather than the entire approved limit.
• Greater Cash Flow Flexibility: Businesses can access funds when expenses arise or customer payments are delayed.
• Funding for Opportunities: An available facility can help cover costs associated with a time-sensitive order or contract.

However, flexibility does not remove the obligation to repay. A Revolving Credit Facility still needs to be managed within the business’s cash flow and repayment capacity. It can act as an alternative to a traditional overdraft, which has become increasingly difficult to secure for many UK SMEs.

How Much Does a Revolving Credit Facility Cost?

The cost of a Revolving Credit Facility generally includes interest on the amount borrowed, alongside any fees set out in the agreement.

These can vary considerably between lenders, so it is important to look beyond the headline interest rate. Depending on the facility, charges may include:

• Arrangement Fees: For setting up the facility.
• Drawdown Fees: Applied each time funds are withdrawn.
• Commitment or Non-Utilisation Fees: Charged for keeping some or all of the agreed credit available, even when it is unused.
• Renewal Fees: Payable if the facility is extended or renewed.

Some lenders may also apply additional charges if repayments are late or the business breaches the terms of the agreement.

Comparing the overall cost, including fees and repayment conditions, gives a more accurate picture than looking at the interest rate alone.

What Are the Potential Drawbacks?

Although a Revolving Credit Facility can offer flexibility, there are several considerations before taking one out.

Security and personal guarantees may be required, depending on the lender and facility. A personal guarantee can make the guarantor personally liable if the business fails to meet its obligations. It is important to understand exactly what it covers before agreeing to one.

Repayment commitments also need to be manageable. Missed payments can affect the business’s credit profile and make future borrowing more difficult. Check the repayment schedule, minimum payment requirements and any deadlines for clearing the balance.

Finally, an RCF should not be treated as a permanent source of funding. Lenders may review the facility and can change its limit, terms or availability in accordance with the agreement. It is generally intended for short-term working capital rather than long-term investment or covering ongoing trading losses.

Revolving Credit Facility vs Business Loan vs Overdraft

A Revolving Credit Facility, business loan and business overdraft can all provide access to business funding, but they work in different ways.

A business loan provides a lump sum upfront, which is repaid over an agreed term. It can be suitable for a known, one-off expense such as purchasing equipment, a vehicle or expanding premises.

An RCF provides an agreed credit limit that can be drawn down as needed. As principal is repaid, the available credit is restored, making it useful for recurring working capital requirements.

A traditional business overdraft allows a company to borrow through its business current account, up to an agreed limit. Like an RCF, it offers flexibility, although the interest, fees, repayment arrangements and review conditions may differ.

However, access to traditional business has become more challenging for SMEs in recent years. According to the OECD's Financing SMEs and Entrepreneurs 2026 report, the value of overdrafts used by UK SMEs fell to £6 billion in 2024, the second-lowest level on record. The report also highlights that smaller businesses have found it increasingly difficult to secure new overdrafts or increase existing limits.

As traditional overdraft facilities become harder to access, revolving credit facilities may offer an alternative for businesses looking to secure flexible funding and manage their working capital.

The right type of funding depends on the amount required, how frequently the business needs to borrow and the repayment structure that best matches its cash flow. With traditional business overdrafts becoming harder for SMEs to access, revolving credit facilities offer an alternative way to secure flexible funding, allowing businesses to draw down funds as and when they are needed.

Find out more about business loans and revolving credit facilities.

Who Can Get a Revolving Credit Facility?

Eligibility depends on the lender, but Revolving Credit Facilities are generally aimed at established businesses with a track record of trading and a demonstrable ability to manage repayments.

When assessing an application, lenders may consider the company’s trading history, turnover, cash flow, existing borrowing and overall financial position. They may also review the purpose of the facility and whether the requested limit is appropriate for the business.

Some lenders may require security or a personal guarantee. Others may have minimum turnover or trading-history requirements. Revolving credit is commonly available to limited companies, although eligibility and availability for other business structures will depend on the provider.

Is a Revolving Credit Facility Right for Your Business?

A RCF may be worth exploring if your business regularly experiences short-term cash flow gaps, needs to cover costs before receiving customer payments or wants access to funding for recurring working capital requirements.

It is less likely to be the right fit for a single, clearly defined investment that would be better funded through a term loan. If unpaid invoices are the main cause of cash flow pressure, invoice finance may also be worth considering.

Before committing, look at your cash flow forecasts, the full cost of the facility and the conditions attached to further drawdowns. It is also important to understand when the lender can review or change the available credit.

Flexible Funding When Timing Matters

The right business finance depends on how your company operates, what the funding is needed for and how repayments fit into its cash flow.

Charles & Dean is a credit broker, not a financial adviser. We compare options from our lender panel and assist with the application. Any facility, limit and price offered is subject to the lender's criteria and assessment.

Speak to our Business Finance Team on 01780 763836 or request a quote online.

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David Rodriguez Campo

Head of Business Finance at Charles & Dean

David is an experienced SME finance professional with over six years’ experience in the industry and a strong track record of building high-performing teams. He specialises in tailored funding solutions, combining market insight with an analytical approach to deliver clear, practical content for SME audiences. With an entrepreneurial background, he understands the challenges business owners face and brings a commercially focused perspective. His insight and experience position him as a trusted voice in the SME finance market.