Overdrafts and revolving credit facilities – what's the difference?

Most of us are familiar with the concept of an overdraft. An overdraft gives you access to a predetermined limit once your bank balance hits zero. So even if you don't have funds in your account, you can still withdraw until you reach the overdraft limit.

Although a revolving credit facility (RCF) is similar to a bank overdraft, there are key differences. Like an overdraft, a revolving credit facility comes with a set limit. 

But instead of extending your business bank account's balance, you can use and repay the funds when required, as long as it's within the credit limit and agreed term. It's like taking out short-term loans without having to apply each time separately. 

Let's take a look at some of the key features and differences.

Revolving credit facilities vs overdrafts 

• Unlike an overdraft, a revolving credit facility isn't linked to your bank account and resembles a new credit agreement.

• You'll agree to a set term, such as three years. Once the time is up, you might be able to extend it or take out a new one with the same lender. 

• While an overdraft is attached to your current account at your business bank, revolving credit facilities are available from multiple lenders. 

• Getting a revolving credit facility from a specialist lender might be easier than getting an overdraft through your business bank.

• Although individuals and businesses can get overdrafts, revolving credit facilities are just for businesses. You'll usually have to be a limited company.  

• Revolving credit facilities are flexible. For instance, you can repay more when trade is good and make smaller repayments during seasonal dips. 

How does a revolving credit facility work?

Every lender has its own set of eligibility criteria.

Suppose you apply for a revolving credit facility. In that case, the lender will likely consider your business' credit rating and those of its directors, the business' cash flow performance, any other debt the company has and your reason for applying for finance. 

(RCFs are designed for short-term cash flow purposes.)

You can draw on your available balance as and when you need to. You'll request the lender, and they'll transfer the money to your business bank account. You don't have to use the total amount, and you'll only pay interest on what you use. 

Here's a super simple revolving credit facility example:

"Example Company" takes out a revolving credit facility with a limit of £4,000. It withdraws £2,500 to purchase some additional stock before a seasonal peak. After buying the store, they repay the £2,500 (plus interest) over the next couple of months. After repaying it in full, they can reaccess the full £4,000.

How's a revolving credit facility different from a credit card?

Unlike a business credit card, revolving credit facilities don't typically come with payment cards (some do, though). In this sense, a revolving credit facility is similar to a merchant cash advance (MCA), where a lender provides a business with a cash injection. 

Unlike an RCF, the funds – plus interest – are repaid through a percentage of the business' customer card payments. 

Whether you're looking for a business overdraft alternative, revolving credit facility, business credit card, merchant cash advance or a different type of funding entirely, use Funding Options to see what you could be eligible for without affecting your credit score.