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As a business owners, the term revolving credits or non revolving credits should be familiar to you. Whether you heard from it through a banker or from fellow friends, you might wondering how it works and under which circumstances you should choose the one over the other.

Revolving Credit Facility

Think of it as “revolving”, borrowers can borrow and payback multiple times through a use of credit line issued by financial institutions. It is not consider a term loan because during the allocated period of time, this revolving credits facilities allows the borrower to borrow, repay and repeat. However, for term loan, borrowers will get a certain amount of funds with fixed repayment schedule.

How Business Can Apply For Revolving Credit Facility and Use It ?

A revolving credit facility is usually issued by banks or funders. It is typically a line of credits used by private business and the criteria for approving the amount depends on the stage, size and industry that the business is it. Banks or funders would usually examine the financial statements such as income statement, balance sheet etc. to determined if the business will be able to repay the debt.

Should a company have good credit rating, steady income and strong cash reserves, the odds of getting a higher credits and approval will be higher.

Example Of How a Business Can Use The Facility

XZY Packaging company secures a revolving credit facility line of $500,000 and the company uses the line to cover payroll and other overhead while waiting for their account receivables (money to be paid to XZY) payment. XZY company uses $300,000 of the revolving credits on a monthly basis and pay it off to the banks once their account receivables is received.

One day, ABC company engaged XZY for packaging service for the next 3 years with a contract size of $500,000. With the secured contract, XZY is able to use $200,000 of it’s revolving credit facility to purchase the required machinery for the contract.

Non-Revolving Credit Facility

Non-revolving credit is the opposite of revolving credit facility. Instead of having access to the funds whenever the business needs it, non-revolving credit cannot be used once it is paid off.

The credit facility is granted on a one-time basis and it will be disbursed fully with the business owner agreeing on the interest rates and repayment schedule, usually with monthly payments. The common non-revolving credit that is on the market is the business term loans.

Example Of How a Business Can Use The Non-Revolving Credit Facility

123 Company has decided to scale up it’s operations and expansion to a larger manufacturing space. By securing a non-revolving credit facility of $500,000, 123 Company owner get to decide how the funds can be use in their future operations. Whether is it for manpower, purchasing of goods.. it boils down to the business owner needs and forecast.

Which Credit Facility Should SME Owner Choose ?

This depends on the financing requirements that the SME is looking for.

Typically, if it is a short term funding needs such as payroll, SME owner can look into revolving credit as a “Back Up Facility” to deal with sudden and short term working capital emergencies and without affecting the operations of the business and ensure cash flow is healthy.

And for long term funding such as expansion, buying more machineries or getting more stocks/supply, SME owner can venture into non-revolving credit where it will take years before the returns will be materialize.

Make an appointment with us and our consultants will be able to advise which facilities would be fit your upcoming project or uses.