Revolving Credit vs Term Loan For Business
Navigating the Business Finance Maze
Every successful business knows that cash flow is king. But when you need to access capital, the options can feel overwhelming. Two of the most common and powerful tools in the UK business finance arsenal are the revolving credit facility and the standard term loan. But what’s the difference, and more importantly, which one is the right fit to sustain your business? This article will break down the key features of each and help you decide which is your best lifeline.
The Term Loan: The Predictable Power-Up
A term loan is what most people think of as a traditional loan. It’s a lump sum of money provided upfront, which you then repay in fixed instalments over a set period. It’s ideal for a specific, one-off investment.
Core Characteristics
- Fixed Amount: You receive the entire amount in one go.
- Fixed Repayment: You pay the same amount each month.
- Defined Term: The loan has a clear start and end date (e.g., 3, 5, or 10 years).
The Revolving Credit Facility: The Flexible Lifeline
Think of a revolving credit facility, often referred to as a “credit line,” as a flexible pool of funds your business can draw from as needed. It’s a key working capital solution for managing day-to-day operations and unforeseen expenses.
What is the fundamental difference between a revolving credit facility and a standard term loan?
The fundamental difference is in how you access and repay the capital. A term loan gives you a single, large sum upfront that you repay with interest over a fixed term, regardless of how you use it. A revolving credit facility provides continuous access to a pre-approved amount of capital. You can draw from it, repay it, and draw again, only paying interest on the amount you’ve actually used. This makes it a perfect flexible business finance tool.
Core Characteristics
- Flexible Access: You can draw down funds as you need them, up to your credit limit.
- Interest on Use: You only pay interest on the money you have drawn.
- Continuous Capital: As you repay the borrowed amount, the funds become available again for you to use. This provides continuous access to capital.
Choosing Your Lifeline: When to Use Which?
The right choice depends on the purpose of the funding.
| Scenario | Ideal Solution | Why? |
| Buying a new fleet of vehicles | Term Loan | This is a large, defined, one-off expense. A lump sum is needed. |
| Managing seasonal inventory spikes | Revolving Credit | Allows you to draw funds for inventory during peak season and repay as sales come in, then use it again next year. |
| Office renovation or expansion | Term Loan | A clear, project-based cost that requires a fixed sum. |
| Bridging the gap between invoices | Revolving Credit | Provides short-term liquidity to cover expenses while waiting for client payments. |
| Hiring and training new staff | Revolving Credit | Funds can be drawn as needed for salary, training, and onboarding costs. |
When is a revolving credit facility a better choice for managing ongoing cash flow needs?
A revolving credit facility is a better choice for ongoing cash flow needs when your income or expenses are inconsistent. This could be due to seasonal fluctuations, delayed client payments, or unexpected costs like a machinery repair. It provides a financial safety net, allowing you to smooth out cash flow gaps without committing to a fixed, long-term repayment schedule.
Key Considerations: Rates, Requirements, and Risk
Do revolving credit facilities have higher interest rates or stricter eligibility requirements?
Revolving credit facilities sometimes have slightly higher interest rates than secured term loans, as they are often unsecured and offer greater flexibility. However, it’s crucial to compare the total cost, not just the interest rate. A term loan might have a lower rate but a higher total cost if you don’t need the full lump sum immediately. When it comes to eligibility, it varies by lender. While some may have stricter criteria for a flexible product, many focus on the business’s overall health and trading history rather than just assets. The key is finding a lender that understands your business profile.
Finding Your Perfect Fit with Fundify Funding
Understanding the difference between a revolving credit facility UK and a term loan is the first step. The next is finding the right partner to help you secure the funding you need. At Fundify Funding, we specialise in helping businesses like yours navigate the world of business finance. We offer a wide range of working capital solutions, understanding that one size doesn’t fit all. Whether you need a simple term loan for a big purchase or a flexible credit line for ongoing cash flow, we can help you find a solution that works for you.
Making the Right Call
Choosing between a term loan and a revolving credit facility boils down to one question: is your need for capital fixed and one-off, or is it continuous and flexible? By understanding the key distinctions, you can make a strategic decision that strengthens your cash flow and puts your business on a solid footing for future growth.
