Revolving Credit Facility: The Flexible Credit Line for UK Companies

A revolving credit facility (RCF) is one of the most flexible ways for a UK limited company to fund short-term, fluctuating cash needs. Instead of borrowing a fixed lump sum and paying interest on all of it, your company agrees a credit limit with a lender and then draws down, repays and redraws against that limit as often as it likes. You pay interest only on the balance actually drawn. Think of it as a business overdraft alternative built for lumpy and seasonal cash flow.

This guide explains how an RCF works, what it really costs once you add the non-utilisation fee and arrangement fee, how it compares to an overdraft and a term loan, who qualifies, and the situations where a revolving facility is genuinely the cheaper choice. It is written for company directors and finance managers, not personal borrowers.

Company borrowers only. The finance introductions on this page are for UK limited companies and limited liability partnerships borrowing for business purposes. We introduce your company to a panel of commercial-finance brokers. We are not a lender and do not give regulated credit advice. If you are a sole trader, an individual, or borrowing for personal or household purposes, this service is not for you and you should speak to an FCA-authorised consumer-credit firm.

What a revolving credit facility is

A revolving credit facility is a pre-agreed pool of credit your company can dip into on demand. The lender sets a limit, say £100,000, and for the term of the agreement (commonly 12 to 36 months) you can draw any amount up to that limit, repay it, and draw again. The balance revolves up and down with your needs, which is where the name comes from.

The mechanics are simple. When your company needs cash, you request a drawdown and the funds hit your account, often the same or next day once the facility is live. Interest accrues daily on whatever you have drawn. When customers pay you or the pressure eases, you repay some or all of the drawn balance, interest stops on the repaid portion, and the headroom is available again. There is normally no penalty for repaying early, which is a key difference from many term loans.

Because your company only pays for the money it uses, an RCF suits businesses whose cash requirement swings through the month, quarter or year rather than sitting flat. It is a working-capital tool, not a way to fund a long-term investment.

How an RCF works in practice

Three features define how a revolving credit facility behaves:

• The facility limit. The maximum your company can have drawn at any one time. Lenders size it against turnover, profitability, your debtor book and cash-flow pattern, often up to one or two months of turnover for a working-capital line.
• Drawdown and repayment. You draw in tranches up to the limit and repay when you can. Most facilities let you repay and redraw freely; a few set a minimum drawdown period or short notice on repayment, so read the terms.
• Interest on the drawn balance only. Interest is charged on what is outstanding, usually as a margin over a reference rate (for example, Bank of England base rate plus a margin), accrued daily. Hold nothing drawn and you pay no interest, only the non-utilisation fee on the unused limit.

Facilities come in two flavours. A committed RCF means the lender is contractually bound to make the money available for the whole term and cannot pull it at short notice, which is what you want for dependable seasonal cover. An uncommitted facility is cheaper but the lender can reduce or withdraw availability, so it is less reliable when you most need it.

RCF vs overdraft vs term loan

These three products overlap, and choosing the wrong one is a common and expensive mistake. The table below sets out the core differences for a limited company.

Feature	Revolving credit facility	Business overdraft	Term loan
How you draw	Draw, repay, redraw up to a limit	Draw, repay, redraw on your account	One lump sum up front
Interest charged on	Drawn balance only	Overdrawn balance only	The whole outstanding balance
Certainty of access	Committed for the term (if committed)	Usually repayable on demand	Fixed for the term
Typical size	£10k to several million	Smaller, banks have scaled back	£5k to several million
Undrawn cost	Non-utilisation fee	Usually none	Not applicable (all drawn)
Best for	Lumpy, seasonal, repeated gaps	Small day-to-day swings	A fixed one-off purchase

In short: an overdraft handles small daily swings but can be withdrawn on demand and is increasingly hard to get in size. A term loan is right when your company needs a fixed sum for a defined purpose and will hold it for the term. A revolving credit facility sits between them, giving overdraft-style flexibility with term-loan-style commitment and larger limits, which is why it has become the go-to working-capital line for growing companies.

What a revolving credit facility costs

An RCF has three cost components, and understanding all three is the difference between a cheap facility and an expensive one:

• Arrangement fee. A one-off fee to set up the facility, commonly around 1% to 2% of the limit, sometimes rolled into the facility or charged on renewal.
• Interest on the drawn balance. A margin over a reference rate, charged daily on what you have drawn. This is your main variable cost and only accrues when you use the money.
• Non-utilisation fee. A charge on the undrawn portion, typically 0.5% to 2% a year, paid for the lender keeping the capital reserved and available on demand. Not every facility has one, so it is worth comparing.

There may also be a small drawdown or admin fee per transaction with some lenders. The headline interest rate alone tells you very little; the total cost depends on how much you draw, for how long, and the size of the non-utilisation fee on the rest.

Worked example: RCF vs a term loan for the same need

A wholesale company agrees a £100,000 revolving credit facility to smooth its trading cycle. Across the year it draws to cover stock builds and payroll gaps, but the balance rises and falls, and the average drawn balance works out at £30,000. Assume an interest margin giving roughly 9.5% on the drawn balance, a 1% non-utilisation fee on the undrawn amount, and a 1.5% arrangement fee.

• Interest: 9.5% on the £30,000 average drawn = £2,850 for the year.
• Non-utilisation fee: 1% on the £70,000 average undrawn = £700 for the year.
• Arrangement fee: 1.5% of the £100,000 limit = £1,500 one-off.
• Total year-one cost: around £5,050, of which about £3,550 recurs each year after the one-off arrangement fee.

Now compare a £100,000 term loan taken to cover the same need. The company draws the full £100,000, even though it only needs £30,000 on average, and pays interest on the whole outstanding balance. At 9.5% that is roughly £9,500 of interest in the first year on a fully drawn balance, and the company is holding £70,000 of borrowed cash it does not need, paying to sit on it. Even after amortisation reduces the balance over time, the term loan costs far more to solve a fluctuating problem.

The lesson: match the product to the shape of the need. A lump-sum term loan for a lumpy, revolving requirement means paying interest on money you are not using. That is the single biggest reason companies overpay for working-capital funding.

Eligibility: who qualifies for an RCF

Lenders assess a revolving credit facility much like any company loan, with a particular eye on cash flow because the balance moves. Typical factors:

• Trading history. Established companies with two or more years of filed accounts get the widest choice and best rates. Younger companies can still qualify with alternative lenders, usually at smaller limits.
• Turnover and profitability. The facility is often sized against turnover, so a stronger, more predictable top line supports a larger limit.
• Cash-flow pattern. Because the facility revolves, lenders want to see that drawings will be repaid, so a clear working-capital cycle (customers paying on terms, seasonal peaks and troughs) helps.
• Directors' covenant. Directors' credit profiles matter, and most unsecured facilities to smaller companies come with a personal guarantee.

Because the facilities we introduce are for limited companies and LLPs borrowing for business purposes, this is not regulated consumer credit and no FCA consumer-credit authorisation is engaged in the introduction. Sole traders and individuals borrowing personally are a different, regulated matter and should approach an FCA-authorised firm directly.

When an RCF beats a term loan, and when it does not

A revolving credit facility is the better tool when your company's cash need is uncertain, repeated or seasonal. Classic cases:

• A wholesaler or retailer building stock ahead of a Q4 peak, then repaying as sales come through.
• A services company bridging the gap between paying staff and being paid by clients on 30 to 60 day terms.
• A business with a lumpy sales cycle that needs standby liquidity but cannot predict exactly when.

A term loan wins when the need is a defined lump sum held for a fixed period: buying premises, a vehicle, or funding a specific project. For a big one-off asset purchase, asset finance is usually better still because it spreads the cost against the asset and can unlock capital allowances. Where the working-capital gap is driven by unpaid invoices specifically, invoice finance can release more cash than a general RCF because it scales with your debtor book. Many companies run an RCF alongside a term loan or asset finance, using each for what it does best.

The revolving structure shines for seasonal businesses. A garden-supplies company, for instance, spends heavily on stock in late winter, sells through spring and summer, and sits quiet in autumn. A term loan would have it paying interest on a full balance through the quiet months; an RCF lets it draw hard in the build-up, repay as revenue lands, and pay almost nothing (just the non-utilisation fee) in the trough. Over a full year the saving is substantial.

An RCF also works as a standby liquidity line: agreed and ready, drawn only if an unexpected cost or opportunity arrives. The company pays the non-utilisation fee for the peace of mind and full interest only if and when it actually draws. For a director who wants a safety net without the cost of idle borrowed cash, that is often the most efficient structure available.

Tax treatment of RCF costs

For a limited company, interest and most arrangement and commitment fees on a facility used wholly for the trade are generally deductible against corporation tax under the loan-relationship rules, which reduces the real cost of the finance. With corporation tax at 19% on profits up to £50,000, 25% above £250,000 and an effective 26.5% marginal rate in the band between, that deduction is worth more the higher your profits sit. The exact position depends on the purpose of the borrowing, so confirm the treatment with your accountant rather than assuming it. For the underlying mechanics, see our guidance on corporation tax and marginal relief.

How to apply for a revolving credit facility

Applying is straightforward, and going through a broker panel means your company is tested against multiple lenders at once rather than applying one at a time and collecting declines. You will typically need:

• Your latest filed accounts and, often, recent management figures.
• Recent business bank statements (commonly three to six months) so the lender can see the cash-flow pattern.
• An idea of the limit you want and how you will use the facility.
• Details of the directors for the credit and guarantee assessment.

To see how a revolving credit facility fits alongside the other options, read our complete guide to business loans, our overview of working capital finance for matching the product to the cause of your cash gap, and, if your income is card-led, our guide to merchant cash advances as an alternative structure.

The information above draws on official guidance. For independent, non-commercial background on business finance and the products available to UK companies, see the British Business Bank and the government's finance and support for your business service. The regulatory boundary that keeps company business lending outside the consumer-credit regime is set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (see the exempt-agreement and business-purpose provisions around Article 60C). For the corporation-tax treatment of interest and finance costs, HMRC's Business Income Manual (BIM45301) is the primary reference, and the Bank of England publishes the lending-conditions and base-rate data that drive facility pricing.