Revolving Credit Facilities
In this working capital guide will be answering the question: “What is a revolving credit facility?”.
Revolving credit facilities are a great alternative to a traditional overdraft provided by the high street banks. The funder agrees a line of credit with the business which can be drawn down and repaid during the agreed term.
Interest is often charged for the funds drawn, for the time they are drawn and dependant on the lender there is little to no charge for funds which aren’t drawn. When you combine that with often no set-up fee involved, this type of facility is often chosen as a ‘rainy day fund’.
How does a revolving credit facility work?
Revolving credit facilities are exactly that, they revolve. As opposed to a fixed business loan which runs for a term of say 3-5 years, a revolving facility is often a rolling agreement with the initial term either 12 or 24 months, with some facilities being structured on an ongoing rolling basis similar to that of a credit card.
- Quick – can be set up much quicker than a traditional overdraft or bank loan, often within a matter of days.
- PG backed – no security tied to the debt and as a result no legal or valuation fees.
- Flexibility – This product is perfect for businesses with seasonal need for working capital or growing businesses. Although they are often a more expensive option than a business loan, they do provide working capital for business which otherwise would be unlikely to be able to secure more traditional funding.
- You must be a UK based company either registered as a sole-trader, partnership or limited company.
- These types of facilities are available to start-up companies (often capped at a lower amount), as well as established businesses.
- Home ownership is almost always a requirement.
- The amount a lender offer is typically calculated as either one month’s revenue or the average turnover of the last 3 months.
- Credit profile personally & for the business must be fair.
- As these facilities are Personal Guarantee backed, a lender will often apply a 2:1 equity ratio, essentially if the borrower is asking for £40,000, the lender will need to be able to see equity in personal assets of £80,000, covering the debt 2:1.
Our guide on business cashflow finance will be answering the following question: “Asset Finance – What is Leasing & Hire Purchase?”
Leasing and Hire Purchase are two of the most popular forms of finance in the UK, behind only bank overdrafts and credit cards in terms of S.M.E use.
They allow businesses to obtain equipment, machinery or other business assets without large upfront costs that can put a strain on cashflow and working capital.
Hire Purchase contracts usually involve a deposit and fixed payments over an agreed term.
A Lease (either a Finance or Operating Lease) allows the business to use the asset in exchange for rental payments, which may include an advanced rental, over an agreed period.
What is Hire Purchase?
Hire Purchase is where the borrower agrees to purchase an asset from the lender over a specified period. You own the item at the end of the contract. Usually, there is a small fee at the end of the contract to secure title to the asset
What is Leasing?
A Finance Lease works as a rental agreement. The business will agree to a fixed or minimum term rental period for an asset and make regular rental payments for the duration of the lease contract. At the end of the agreement, the business may have an opportunity to continue renting or to return or possibly exchange the asset.
94% of Asset Finance applications are successful
(British Business Bank Small Business Finance Markets report, 2017)
The effects of COVID-19 on S.M.E businesses across the UK has been profound, so let’s be clear, if you’re a business owner worrying about how the market uncertainty is impacting on your business already, or may in the future, you are not alone!
We’ve been assisting lots of clients new and old, who are confused about what funding is available to their business. We thought putting together a series of summaries around the various financial products available to businesses would be a fantastic way to give something back.
The document focuses on invoice finance, you may be aware of how these facilities work. If not, we’ll help answer the question; “What is Invoice Finance?”.
Invoice Financiers use unpaid invoices as security for providing funding. Approved businesses access a percentage of an invoice’s value, typically 85 or 90% and quickly; sometimes within 24 hours. The amount of funding given is based on the risk appetite of the Finance provider.
Invoice Finance is growing in popularity among UK SMEs, particularly those with long cash collection cycles like construction, manufacturing and recruitment.
There are two main types of Invoice Finance, Factoring and Invoice Discounting:
- Factoring allows businesses to generate money against unpaid invoices. The finance provider will lend you up to 90% of the value of your invoices. It will also manage your sales ledger and collect payment for your invoices directly from your customers, hence the term ‘disclosed invoice finance’. They will then deduct the costs of the factoring service, before paying you the remaining balance.
- Invoice Discounting works similarly to Factoring but as a business, you retain control of customer payments, hence the term ‘undisclosed invoice finance’. Your business pays a fee and a ‘discount charge’ (similar to interest) if the funding is utilised, similar to a standard Overdraft.
There are also a few different ways you can finance your debtor book within the two above structures, as illustrated below.
- Selective or Spot Factoring essentially means only funding a select few or single debtor. For example, as a business you may only have one customer who you supply on terms, the rest may pay as soon as the invoice is raised. In this scenario, you would only need to finance that customer’s invoice, for which a selective invoice finance line would work.
- Whole ledger finance is used when all of your customers pay on terms, and as a result, you require your whole debtor ledger to be funded, not just a select one or few.
A question to ask yourself is “How much cash have I got stuck in my debtor book, could having access to 85% or 90% of that capital help my business?”
If you’d like to arrange a no obligation exploratory call to discuss, please get in touch.
A Business Loan is a common form of finance for businesses and one of the first options many S.M.E’s consider when seeking funding. The lender provides money that the borrower pays back, with interest, over an agreed period. Many funders provide business loans in the UK, including high-street banks, challenger banks, peer-to-peer platforms and other alternative finance providers
The best option for your business will vary dependant on what amount of debt it can afford to repay and whether you meet the eligibility criteria, which varies from lender to lender. The main two variable terms of any business loan facility are the repayment period i.e. how long you’ll have to make repayments for, and the interest rate charged.
Your business loan will have a set duration, on average from 1 to 5 years, throughout which you’ll need to repay the amount you borrowed plus interest. Longer terms are available.
The lender may charge you for paying off your debt early as it will have already committed that money to your business. There are however lenders in the market which provide exit fee-free facilities, often these lenders insist on an arrangement fee at the outset.
The interest rate is dependent on how risky the lender perceives the business as a potential borrower.
For example, if you have assets you are willing to offer as security and good personal and business credit ratings, you’ll be deemed less risky than someone who has poor credit and is no willing/able to pledge assets as security.
What documents would I be asked to provide when applying for a business loan?
For a business loan application to be shown in the best light to a prospective lender, you would need to be able to provide the following documents:
- 2 years full accounts (if you don’t yet have two or even your first set of accounts yet published, up to date reports including a profit and loss as well as a balance sheet would be required).
- Last 3-6 months bank statements
- A narrative detailing how your business has been impacted by COVID-19 (if applicable). See our CBIL Guide HereIn addition to the above some lenders may also ask for:
- Last 4 quarters of V.A.T returns
- A detailed cashflow forecast (template can be provided for completion).
How long does it take to get a business loan from start to finish?
Speed is a key factor when searching the market for a business loan. Many ‘tier 1’ high street funders would take between 4-6 weeks to pay out this type of facility, where as a ‘tier 2’ or ‘tier 3’ peer to peer or alternative lender could take between 4 days – 3 weeks.
Often speed of funding comes hand in hand with cost. If the client requires funding quickly it is often the best route via a tier 2 or 3 lenders, as opposed to the Highstreet and as a result the cost of funding generally increases.
We offer free and unbiased advice and will tailor a Cashflow Finance solution for clients to meet their exact needs and budget. Our level of service is extremely high which is vital at a time when more and more businesses are finding that they have to look beyond the traditional Bank overdraft to satisfy their increasing cash flow needs. We will provide you a view of the entire market – quickly and efficiently and can implement a cashflow solution without disruption to the running of your business.
For more information and to see how a flexible revolving credit or cashflow solution can benefit your business Please call us today or submit an enquiry and we will contact you.