A short guide to revolving credit facilities

A revolving credit facility, or RCF, is one of the most flexible working-capital instruments available to a UK SME. Despite that, it is one of the least well understood. Many directors confuse it with a bank overdraft, others with a term loan. It is meaningfully different from both.

This is a short, practical explainer: what an RCF is, how it works in your bank account, what it costs, and when it is the right tool for the job.

What an RCF is

An RCF is an agreed line of credit, sized at a fixed limit, that you can draw down and repay as often as you like during the facility term. You only pay interest on the funds you have actually drawn at any given moment. The undrawn balance is reserved for you, available on demand, against a small non-utilisation fee.

In practice, it looks like a current-account overdraft with a much larger limit, a longer commitment from the lender, and more predictable pricing. The funds typically sit in a separate facility account, from which you transfer balances into your trading account as needed.

How it differs from an overdraft

• An overdraft is generally repayable on demand. An RCF is committed for the facility term, usually three to five years, with annual reviews.
• Overdrafts are typically limited to one or two times monthly turnover. RCFs scale into millions for the right business profile.
• RCF pricing is transparent and contractually fixed. Overdraft pricing can be changed by the bank with relatively little notice.

How it differs from a term loan

• A term loan is a single lump sum repaid in fixed instalments. An RCF is reusable: as you repay drawn balances, the headroom restores.
• You pay interest on the full term loan balance from day one. With an RCF, you only pay interest on what you draw.
• Term loans typically carry early-repayment penalties. RCFs do not: you can clear drawn balances early at no cost.

What it costs

RCF pricing has four components.

1. Interest on drawn funds: typically Bank of England base plus 3% to 6%, charged daily on whatever you have drawn.
2. Non-utilisation fee: 0.5% to 1.5% per year, charged on the undrawn portion of the limit. This compensates the lender for reserving the capital.
3. Arrangement fee: 1% to 2% of the facility limit, paid once at inception.
4. Annual review fee: usually a flat amount, often £1,500 to £5,000, covering the annual facility review.

Non-utilisation fees feel counter-intuitive at first, but they are how RCFs work. The lender is keeping the capital reserved for you, so they charge a small holding cost on the bit you are not using. As soon as you draw, that part shifts onto the interest rate instead.

A worked example

Take a hospitality group with a £750k RCF, drawn against in a seasonal pattern. During the busy summer months and the Christmas trading period, average drawn balance is around £500k. In the quieter shoulder months, it falls to around £150k. Across the year, the average drawn balance is roughly £325k.

• Interest on drawn funds: Bank base plus 4%, equivalent to 9.25% in 2026. On an average £325k drawn, that is roughly £30,000 a year.
• Non-utilisation fee: 1% on an average undrawn £425k, roughly £4,250 a year.
• Arrangement fee: £11,250 one-off in year one, amortised across three years for comparison purposes.
• Annual review fee: £2,500.

Total annualised cost roughly £40,000 for £750k of committed, on-demand headroom. The equivalent term loan would cost more because the business would be paying interest on the full £750k every month, including the quiet ones when only £150k is needed.

When an RCF is the right tool

RCFs sit best when the cash need is genuinely variable. Three classic use cases.

• Seasonal businesses where working capital needs rise and fall through the year (hospitality, agriculture, retail).
• Project-led businesses where lumpy capital needs come and go (consultancy, agency, engineering).
• Acquisition-active businesses that want committed headroom for opportunistic deals without committing to a drawn balance.

The right test for an RCF is variability. If your cash need is the same every month, a term loan is cheaper. If it moves around, an RCF saves you the cost of borrowing money you do not need.

When an RCF is the wrong tool

RCFs are less suitable in three scenarios.

• Single-purpose capital projects: buying a building or a fleet. A term loan, secured against the asset, is cheaper.
• Very small businesses, typically under £750k turnover. RCF arrangement and review fees become disproportionate at that scale.
• Businesses whose working-capital need is driven by sales growth rather than variability. Invoice finance flexes with sales automatically, which is usually cheaper than running a large RCF that is permanently drawn.

RCFs alongside invoice finance

Many established businesses run an RCF and an invoice finance facility in parallel. Invoice finance funds the predictable working-capital base, scaling automatically with turnover. The RCF sits behind it as committed headroom for everything else: seasonal stock build, payroll smoothing, one-off opportunities. The two products are complementary, not alternatives.

What to ask a lender about an RCF

1. What is the non-utilisation fee, and on what part of the limit is it calculated?
2. What is the early-repayment treatment if I want to restructure or clear the facility?
3. How is the facility reviewed annually, and what would trigger a reduction in the limit?

Those three questions surface the practical economics. The headline rate matters, but the non-utilisation fee and the renewal mechanics are where the total cost of ownership is decided.

The summary

Revolving credit is the right tool when your cash need is real but variable. Pay interest only on what you draw, hold the rest as committed headroom, repay early without penalty, and the facility flexes with your trading. For most established UK SMEs above £1m turnover, an RCF deserves a seat at the table when working-capital structure is being discussed.