Credit facility

Q: What is the difference between a credit facility and a loan?

A term loan gives you a lump sum repaid on a fixed schedule. A credit facility gives you a limit you draw on as needed, paying interest only on what's drawn. Loans suit one-off costs; facilities suit fluctuating, recurring needs.

2 min read

Pre-agreed limitBorrow up to it

Draw as neededPay for what you use

Definition

A credit facility is a financing arrangement under which a lender agrees to make funds available to a business up to a set limit, over an agreed period. Rather than receiving the whole sum at once, the business draws down what it needs, when it needs it, and usually pays interest only on the amount actually drawn. The umbrella term covers overdrafts, revolving credit, invoice finance lines and similar arrangements.

In plain terms

A credit facility is more like a tap than a bucket. A standard term loan hands you a fixed lump sum that you repay on a fixed schedule. A facility gives you a pre-approved limit you can dip into repeatedly — borrow, repay, borrow again — paying for what you use.

Facilities split broadly into committed (the lender is contractually bound to provide funds up to the limit) and uncommitted (availability is at the lender's discretion). Revolving facilities replenish as you repay; a drawdown facility lets you take funds in stages. The common thread is flexibility — you keep capacity in reserve without paying for money you haven't used.

Why it matters to your business

For businesses with uneven income — seasonal trade, lumpy projects, late-paying customers — a facility is often a better fit than a lump-sum loan. You're not paying interest on idle funds, and you have headroom ready for the next cash-flow gap without reapplying each time.

Credicorp's Credicorp Flex is a credit facility built for UK limited companies: an agreed limit you can draw on as cash flow demands, lent to the company with no director personal guarantee. The trade-off versus a term loan is that facilities can be more expensive per pound borrowed if you keep a lot drawn long-term — so match the tool to the need.

Example

A seasonal homeware retailer agrees a £100,000 credit facility in spring. Through quiet summer months it draws just £20,000 to cover overheads. As autumn stock orders ramp up, it draws closer to the full limit, then repays through the Christmas trading peak. Across the year it pays interest only on what it actually used — far less than if it had taken a £100,000 lump-sum loan and sat on most of it through the quiet season. The unused headroom cost nothing but was there the moment trade picked up.

Frequently asked questions

What is the difference between a credit facility and a loan?

A term loan gives you a lump sum repaid on a fixed schedule. A credit facility gives you a limit you draw on as needed, paying interest only on what's drawn. Loans suit one-off costs; facilities suit fluctuating, recurring needs.

Do I pay interest on the whole facility limit?

Usually no — interest is charged on the amount you've actually drawn, not the full limit. Some facilities add a small non-utilisation or commitment fee on the unused portion, so check the agreement for any such charge.

What is a revolving credit facility?

A facility where repaying restores your available limit, so you can borrow, repay and borrow again within the agreed term. It works like a reusable line of credit and suits recurring working-capital needs.