Capitalise: What’s the difference between a revolving credit facility and a term loan?

If you’re looking for business finance, there’s a variety of funding products to choose from. Two commonly used finance options are revolving credit facilities and term loans. Both can be effective tools for businesses looking to ease a cash flow gap or invest into the business. In this article, we'll delve into the differences between a revolving credit facility and a term loan, helping your business navigate your choices for funding. 

Revolving credit facilities

A revolving credit facility offers businesses access to a pre-approved amount of funding, which can be drawn upon as needed. Similar to a credit card, businesses have the flexibility to borrow, repay, and borrow again, up to the predetermined credit limit. Interest is only charged on the amount borrowed and for the duration it is outstanding. 

Revolving credit facilities are often used for short term needs, such as managing a cash flow gap, covering emergency expenses, or funding seasonal stock purchases.

Term loans

A term loan provides a lump sum of money upfront, which is repaid over a fixed period. Interest rates are typically fixed and repayments are made in regular, usually monthly, instalments. 

Term loans are commonly used for longer term investments, such as purchasing equipment, or expanding your business operations. Unlike revolving credit facilities, once the funds are repaid, they cannot be borrowed again without applying for a new loan.

Key differences between a revolving credit facility and a term loan

Flexibility vs predictability

Revolving credit facilities offer flexibility in terms of borrowing and repaying funds as needed, providing businesses with quick access to cash when required. On the other hand, term loans provide predictability with a fixed repayment schedule, allowing businesses to budget effectively over the loan term.

Interest cost

With revolving credit facilities, interest is only charged on the amount borrowed and for the duration it remains outstanding. This means businesses can save on interest costs by repaying the borrowed amount sooner. In contrast, term loans accrue interest on the entire loan amount from the outset, regardless of how much is actually used.

Purpose of financing

Revolving credit facilities are more suitable for short term financing needs. Term loans can be better suited for longer term financing needs where a fixed amount of funding is required upfront.

Choosing the right option

When deciding between a revolving credit facility and a term loan, it’s important that you consider your business’ specific needs, cash flow projections, risk tolerance and long term objectives. Ultimately, the choice between the two depends on factors such as the reason you’re looking for funding, the amount needed, and your business's ability to repay.

Applying for finance

Whether you’re looking for a revolving credit facility, a term loan, or another type of business loan, we can help. At Capitalise we work with 100+ lenders to match your business with the right fit funding. Just start a funding search today to get started.