What is Revolving Credit Facility?
In an age where corporate overdrafts are more and more difficult to come by, inventive alternatives are becoming increasingly popular. This article examines Revolving Credit Facilities – what are they and how do they assist?
In personal banking, an overdraft is a beneficial safety net to have for months that are difficult or expensive. This ensures that even if the account balance falls below zero, the direct debits will be processed and the card will not be denied at the grocery store.
Overdrafts on business accounts are becoming less common, but a revolving credit facility serves essentially the same function, which is why it is sometimes referred to as an overdraft substitute. It provides the security of knowing that credit is readily available whenever the organization requires it.
A Contract, not a Loan
Revolving credit Facility is an ongoing agreement between a business and a financial institution whereby a credit line up to a specified limit is accessible whenever it is required. In this regard, it is comparable to a credit card contract. If you keep the card in your wallet but never use it, there is no cost. If you decide to utilize the offered credit facility, there are minimum monthly payments and interest charges to consider.
If you take advantage of the whole credit amount, then as soon as you have repaid a fixed amount, you can borrow more – this is why the name “revolving” is used, it is a credit line that you can keep utilizing time and again, as long as you do not exceed the overall credit limit.
Is your Business Eligible?
Again, there are striking parallels with a personal credit card. If a business is in good financial condition with a great credit rating and a full order book, there is every possibility that finance providers will be falling over one another to grant a revolving credit line.
Even if the financial situation is little less than ideal, there will still be access to revolving credit. In this instance, however, limitations may be reduced, interest rates may be increased, and there may be stricter guarantee requirements.
Advantages and Disadvantages of Revolving credit facility
Obtaining a credit line in this manner is often simple and quick. In this era of machine learning and financial bots, an internet application can proceed from initial submission to final acceptance in a matter of minutes, and money can sometimes be made available the same day.
This alternative to an overdraft is intended for short-term borrowing, such as working capital and day-to-day expenses. As interest is often charged daily you only ever pay for what you use, a bit like pay-as-you-go, and thus it may be a really sensible way of funding your business.
If, on the other hand, you require a sum of money for a longer length of time, this form of borrowing is not for you because there are more cost-effective financial instruments meant to fund longer-term goals.
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