Which finance solution is right for your business: Revolving Credit Facility vs. Term Loan?
As a small or medium sized enterprise (SME), your business is likely to be looking for the best ways to fund ongoing growth and better manage cash flow.
A revolving credit facility and a term loan are both financial solutions that can help businesses access the working capital they need. Both forms of finance offer access to cash, can be flexible in application and used for various business-related purposes.
But which one is better for your business: Revolving loan vs term loan?
Let’s break down the differences to help you find the facility that best suits your business’s needs.
For a custom consultation with a lending specialist, give the ScotPac team a call on 1300 863 507.
What is a Revolving Credit Facility and how does it work?
A revolving credit facility gives your business access to an agreed credit limit to draw the funds when you need.
When you repay the funds drawn down you can then redraw that money as needed. In other words, it provides a line of credit to serve as an ongoing financial safety net when you need access to flexible working capital.
A revolving credit facility is sometimes referred to simply as a revolving loan.
What are the benefits of a Revolving Credit Facility
Pre-approval
You only require one credit limit approval to enjoy ongoing access.
Interest payments
You only pay interest on the funds you draw making a revolving loan significantly more cost efficient.
Redraw facilities
Once repaid, you can re-borrow funds when you need.
Cash flow management
A revolving loan is ideal for managing cash flow or covering short-term operational costs.
Fast access
In addition to removing the need to reapply for future access to working capital, drawing the funds you need is simple and quick.
When is a Revolving Credit Facility the right choice?
A revolving credit facility may be the right choice for you if your business:
- Needs to cover cash flow gaps
- Experiences seasonal fluctuations in sales
- Needs to purchase inventory or materials upfront
- Needs start-up funding
- Has an emergency expense
- Needs to cover delayed payment from customers
- Needs to fund short-term investment
- Wants to expand and grow
- Needs to manage rising supply chain costs
- Needs to manage import/export costs
- Requires additional funding for daily operations
- Wants a financial safety net
Ready to discover how a revolving loan can help you avoid the rigid repayment and extra interest costs of traditional loans? Contact ScotPac today.
Revolving Loan vs Term Loan: what is the difference?
A term loan differs from a revolving loan in several ways.
1. A term loan provides a lump sum of cash up front.
2. Term loans are repaid over a fixed period.
3. Term loans have a pre-agreed interest rate and repayment schedule.
When should a business use a Term Loan?
In general, term loans should be used for larger and/or one-off business investments to help scale and fund growth.
For example, if your business is looking to do any of the following, a term loan may be the right finance solution:
- Invest in new business equipment
- Buy new vehicles
- Fund renovations
- Purchase business space
- Fund long-term growth projects
Term loans provide more predictability and budget certainty as they have:
- A fixed repayment schedule
- No redraw option on funds
- Interest applied to the full loan amount and therefore consistent costings
When is a Term Loan not as good as a Revolving Credit Facility?
If your business needs funding for ongoing working capital needs, such as ensuring operations continue smoothly, a revolving loan will be better suited for your needs.
How do Revolving Loans compare with other finance solutions?
Comparing revolving loans vs term loans is one thing, but what about other business and commercial finance solutions?
Revolving Loans vs Overdraft
Compared to an overdraft, a line of credit is often preferred for businesses seeking a larger credit limit and fewer account restrictions.
Revolving Loans vs Invoice Finance
Revolving loans can and are used in conjunction with Invoice Finance to ensure available funding as well as to unlock funds from unpaid invoices.
Revolving Loans vs Trade Finance
Similarly, a revolving credit facility can work in a complementary way with trade finance to support international or domestic trade transactions.
At ScotPac, our lending specialists work with you to find the right comprehensive and tailored set of working capital solutions.
Would you like to explore the benefits of a Revolving Loan vs Term Loan for your business?
For over 35 years, ScotPac has been helping Australian businesses and SMEs fuel their success. We currently support more than 9,300 businesses ensuring the right tailored finance solution that meets their needs.