How Can Businesses Benefit from a Revolving Credit Line?
As businesses are thrown into crisis by the coronavirus pandemic, revolving credit facilities could help many to remain solvent.
When faced with the question of conjuring up new funds as a business, it can be difficult to decide which avenue to take. There are many options to help a business stay afloat, size up, or pay for renovations or investments that are imperative for growth. Revolving credit facilities are one way in which your business could make its necessary purchases and stay in the black on day-to-day spending while being able to make payments on the loan. But what are revolving credit facilities and what kinds of businesses might benefit from them?
Revolving credit facilities are essentially a line of credit extended from a bank to a business. There is a maximum amount, but aside from this, the business has access to the money as and when they need to use it. It is a short-term form of finance for a business, so would suit those who need a cash injection and know with the temporary blip out of the way, they’ll easily be able to repay the money. It wouldn’t suit a business who is looking to take a risk as the money will need to be paid back in the terms. The bank considers a range of factors – balance sheets, finances and so on – before it deems a business creditworthy.
The main kind of business that would benefit from a revolving credit facility is one suffering cash flow problems or that needs a temporary lift. Revolving lines of credit differ from other kinds of business loans as once you have paid off some of the balance, you can then withdraw more on the rolling agreement. There are many kinds of business loans to choose from, including a line of credit, which may be more suitable for some businesses. A line of credit is a loan that once paid off, cannot be accessed again.
The revolving credit facility would, therefore, suit a business that might need to dip back into the pot from time to time, but have proof that they can repay the loan over the long term. This could, perhaps, be a seasonal business with concentrated periods of profitability, one that might have to close for unexpected reasons, or businesses that have to spend money upfront in order to make the profit on it.
Indeed, cruise company Norwegian Cruise Liner Holdings Ltd announced that it had signed for a revolving credit facility to combat loss of earnings during the coronavirus crisis. The money would be used to tide them over for the immediate period of people avoiding cruise ships, with the hope that when the virus is no longer a threat, they will resume business as usual.
There are tertiary issues to consider when choosing the kind of funding that is right for your business and factors out of your control may have an impact in where you source your funding from. For example, reports indicate that only £16 of every £100 of money given to businesses in funding goes to women. While there are plans in place and awareness of the gender pay gap, many are unaware of this gender funding gap, which disproportionately benefits male-dominated businesses and the development of male employees. So, businesses should take this into account when embarking on a quest to find any kind of funding.
There are many options open to businesses when choosing a loan. Some are at the behest of the bank, while other businesses have more scope in how they want to be funded. A revolving credit facility is useful as money can be taken out, paid off when times are better, and then the credit is still available to be used.