Revolving credit or business overdraft? Choose the right safety valve

If a company has a £100,000 limit, draws £30,000 and later repays £20,000, it can normally draw the repaid amount again while the facility remains available. That differs from a term loan, where repaid capital does not usually become available again.

Interest is generally calculated on the utilised balance. The agreement may also charge for setting up, maintaining, renewing or leaving part of the facility unused. A flexible structure is not automatically cheaper once all fees and the likely pattern of use are included.

A business overdraft sits on the current account. Payments can take the balance below zero up to the agreed limit, so it is operationally simple for day-to-day cash flow. The bank may review the limit regularly and, depending on the agreement, demand repayment or decline renewal.

An overdraft can also create concentration risk: the lender can see and control the operating account that receives revenue and pays suppliers. Read set-off rights and events of default, especially if the company holds other accounts or facilities with the same banking group.

An RCF is usually a separate facility. The business requests a draw and receives cash into its operating account. It may be available from a specialist provider rather than the main bank, and the agreement can specify minimum draws, repayment frequency and a fixed availability period.

The British Business Bank notes that small-business revolving facilities commonly run for three months to two years and can require daily, weekly or monthly repayment. Product terms vary widely, so the draw-and-repay mechanics deserve as much attention as the limit.

Good uses have a visible exit: funding seasonal stock until sales arrive, covering the gap between an invoice and customer payment, or bridging a known timing mismatch. The business should be able to point to the event that returns the balance towards zero.

A facility that stays fully drawn can be a sign that a temporary line is funding a permanent working-capital deficit. It is also a poor match for equipment with a five-year useful life if the lender can review or withdraw the line in months.

Model a typical month, a seasonal peak and a downside case. Use the daily or monthly balance you expect, not the full limit or a zero balance. Then include every recurring and one-off fee.

Record the facility expiry or review date in the finance calendar and start renewal discussions early. Provide management information promptly and track any covenants or turnover conditions. A lender is more likely to renew when it can see disciplined use and a balance that clears periodically.

Maintain a fallback: retained cash, another approved line, an invoice-finance option or a plan to slow discretionary spending. Do not wait until the lender changes the limit to discover that payroll depends on it.