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What is a revolving credit facility?
A revolving credit facility (RCF) sets an agreed maximum limit that a limited company can borrow against at any point during the facility term. Unlike a term loan, which is drawn once and reduced over time, an RCF allows the company to draw funds, repay them, and draw again as many times as needed within the limit.
Interest accrues only on the outstanding drawn balance, not on the full facility limit. This makes an RCF efficient for companies with recurring but variable funding needs — they pay for what they use rather than carrying idle debt.
How drawing and repayment work
The company requests a drawdown — subject to any notice period specified in the facility agreement — and the funds are transferred to its account. Repayment can usually be made at any point, restoring availability under the facility. Some facilities impose minimum repayment amounts or minimum holding periods.
At the end of the facility term, the outstanding balance must be repaid in full and the facility is subject to renewal or renegotiation. Lenders typically review the facility annually even within a longer term, and may adjust the limit based on the company's financial position.
Commitment fees and the cost of an RCF
Most RCFs charge a commitment fee or non-utilisation fee on the undrawn portion of the facility — typically a fraction of the margin applied to the drawn balance. This fee compensates the lender for holding the capital available. Companies should factor this into the total cost, particularly if they expect the facility to sit largely undrawn for extended periods.
For companies that need a smaller, less formal flexible buffer, a business overdraft may be simpler, though overdraft limits are generally lower and less stable than a committed RCF.
Security and covenants
RCFs may be secured or unsecured depending on amount and borrower profile. Larger facilities almost always include financial covenants — for example, minimum interest cover ratios or maximum leverage ratios — tested periodically. A covenant breach does not automatically trigger repayment, but it gives the lender the right to demand repayment or renegotiate terms.
Directors should read covenants carefully before signing and model their financial projections against the covenant thresholds to understand the headroom they retain under downside scenarios.
Frequently asked questions
What is the difference between a revolving credit facility and a business overdraft?
An RCF is typically a formally documented, committed facility with a fixed term and agreed drawdown mechanics. An overdraft is more informal, usually repayable on demand, and can be withdrawn by the bank at short notice. RCFs generally offer more certainty but require more documentation and may carry a commitment fee.
Can an RCF be used alongside other facilities?
Yes. Companies often hold a term loan for long-term capital expenditure alongside an RCF for working capital. Lenders will consider the total debt burden and may impose restrictions on additional borrowing via the facility agreement's negative pledge or additional-debt covenants.
Funding for UK limited companies
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