Revolving credit loans are essentially flexible loans whose repayments can be adjusted to suit the needs of the borrower. It can be an ongoing loan, sometimes referred to as an evergreen loan, and as long as the minimum repayment is received monthly, it can be drawn upon to finance the monthly running of a business. An example of a revolving credit loan is credit card use or an overdraft facility.
What Is A Revolving Credit Loan?
Unlike fixed term or closed end loans, where the repayment dates and interest are set within the framework of the loan agreement, revolving credit loans, or open end loans, are a flexible and ongoing advance whose repayments can be changed monthly and credit re-borrowed.
There is a maximum set limit that the lender implements on the loan and a minimum payment, usually a percentage of the loan, that must be paid monthly but repayments are otherwise flexible. It does make sense, however, to pay as much of the loan off as possible to avoid the extra interest costs that the loan incurs.
There are many benefits that a business can take advantage of in accessing a revolving credit loan; with a degree of planning a company can find great benefit from its use. Advantages include:
- Manage Interest Costs
Because you are able to borrow as and when needed, within the maximum limit set by the lender, funds can be accessible immediately, without the need to reapply for further advances. Depending on your needs, this can be a small and habitual or large and irregular amount. This accessibility can be essential in both the short and long term of the running of a business.
Flexibility regarding financing is a huge advantage to a company and, as long as you have the ability to make the minimum payment, the method of borrowing and repayment that revolving credit loans can allow a business to adjust as necessary. When added to the previously mentioned advantages of accessibility, this can provide the kind of continuity that some businesses, such as those with a reliable but inconsistent income, can utilise to great effect.
Manage Interest Costs
If you are unable to repay efficiently due to high interest rates, a revolving credit loan might be the answer. As long as the maximum limit exceeds the original debt and the interest rates agreed with the revolving credit loan are lower, you can significantly reduce your running costs and loan repayments. It should be noted, however, that revolving credit loan interest rates tend to be higher than that of fixed term loans.
As with any loan type, there are some disadvantages to consider. This will largely depend on the individual circumstances of the business, such as other debts, reliability of income and the amount that can be repaid. A few disadvantages include:
- Potentially High Commitment Fees
- Possible Changes
Potentially High Commitment Fees
With the temptation to spend money that you do not have and the ease at which that is possible, the fees incurred with the use of revolving credit loans can add up extremely quickly. It is therefore important to plan properly. Because of the nature of the this type of loan, it can also incur high commitment and penalty fees as well as a crippling level of interest rate if care is not taken.
Not all companies are rendered suitable for this type of loan. If revenues are unpredictable, a bank is likely to consider the risks involved in lending to your company as being too high. This can mean that businesses that are most in need of the kinds of financial help that revolving credit loans provide are the least likely to be able to access them.
It is vitally important to read the small print of any loan contract, and revolving credit loans are no different. Because the terms are not fixed, the lender can decide to change the minimum repayment level or maximum credit limit and may only be obliged to notify you in writing. Although any changes may be unlikely to cripple your business, after all, the lender should not want to alienate their customers or prohibit their repayments, it can still lead to uncertainty.
Fixed term loans do not offer the flexibility that revolving credit loans do, but that isn’t to say that they are all of one type. Interest rates can be variable and repayments can be paid off in a manner that allows them to be reduced. The fixed system can also be beneficial to those that require a structured repayment method.
If cash flow is a problem then invoice factoring may be a better alternative than a straight loan. This can allow you to sell the value of debts owed to your company at a rate determined by the terms of the contract, up to 85% our research has indicated. Once the invoice has been paid by your client, the factor, or lender, is due to release the circa 15% minus fees.
Revenue advance loans are similar to invoice factoring, where a company essentially sells future earnings to free up cash flow. Both invoice factoring and revenue advance loans may carry little risk but can be difficult to obtain for smaller, not so well established businesses.
What Kind Of Business Might Benefit?
Many types of businesses can benefit from revolving credit loans, but it is usually suitable for small to medium sized companies who need continuous access to funds. This can be for various reasons, such as investment in stock that allows for further profit.
Businesses that have a reliable but inconsistent income, such as restaurants or accommodation in tourist areas, can find this type of loan hugely advantageous as they can invest before the main season begins and pay the loan off relatively quickly. This, in turn can allow for a reduction in interest rates and fees.
Those that work in the sales industry may also be able to take advantage this type of loan during the down times in business. This however, will likely only be available to those with a dependable history of profit.