What is Revolving Credit? Key Features and Benefits Explained

Did you know that UK households carry an average credit card debt of £1,241? With over 58.5 million credit cards in circulation, revolving credit is becoming an essential tool for managing expenses. 

But, what exactly is revolving credit, and why should it matter to your business?

Simply put, it allows you to borrow up to a set limit, repay, and borrow again as needed—offering far more flexibility than fixed loans with rigid repayment schedules. For small and medium-sized enterprises (SMEs), this kind of financial flexibility can be a game-changer.

Whether you're covering a cash flow gap, navigating seasonal fluctuations, or seizing a growth opportunity, revolving credit provides the financial breathing room you need. Plus, you only pay interest on what you actually use.

In this article, we’ll explore how revolving credit works, its key benefits for SMEs, and why mastering this financial tool is essential for keeping your business agile and financially healthy.

What is Revolving Credit?

Revolving credit is a flexible borrowing option that allows businesses to access funds up to a set limit, repay what they’ve used, and borrow again as needed—all without having to apply for a new loan each time. This type of credit is commonly found in credit cards, business lines of credit, and revolving credit facilities (RCFs).

One of the key advantages of revolving credit is that you only pay interest on the amount you actually borrow, not on the full credit limit. This flexibility can be a lifeline for businesses navigating seasonal fluctuations or unexpected expenses.

Revolving credit can be secured—backed by collateral such as property—or unsecured, like credit cards, which require no assets.

You might wonder how revolving credit differs from instalment credit. With instalment credit, you borrow a lump sum upfront and repay it in fixed instalments over time. In contrast, revolving credit allows you to borrow, repay, and borrow again as needed, with interest charged only on the outstanding balance.

While revolving credit may come with higher interest rates compared to fixed loans, it remains an excellent option for businesses that need quick access to funds. For instance, business overdrafts provide short-term flexibility tied to your bank account, while RCFs are designed to help manage day-to-day expenses and fuel growth.

For growing businesses, revolving credit facilities offer a seamless way to access funds quickly, avoiding the lengthy loan application processes. However, as with any financial tool, it’s crucial to use it wisely; carrying a balance for too long can lead to significant costs.

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Revolving credit is designed to give businesses the flexibility they need. It gives your business access to a set credit limit that you can dip into, repay, and then use again—whenever you need it. 

Here’s how it works:

• Credit Limit and Usage: Once approved, the lender sets a maximum credit limit based on your financial history. You can borrow up to that limit, repay what you’ve used, and borrow again. It’s as simple as that! This flexibility makes it a great option for managing those unpredictable business expenses.
• Repayment Structure: Every month, you’re required to make a minimum payment based on the amount you’ve borrowed. If you pay more, you free up more credit. But keep in mind, if you carry a balance into the next month, you’ll be charged interest on what’s still owed.
• Interest and Fees: Depending on the type of revolving credit, interest rates can vary. Credit cards tend to have higher rates (20-30%), while options like business lines of credit or HELOCs usually sit lower (around 8-10%). Some credit products also come with non-utilization fees—essentially a charge for keeping the credit available, even if you’re not using it.
• Draw Periods: Some revolving credit options, like HELOCs or business credit lines, come with a “draw period.” During this time, you can borrow funds, but once the period ends, you’ll need to start paying back the principal. At that point, your access to credit might be limited.
• Impact on Credit Score: How you manage revolving credit can make a big difference to your credit score. Keeping your credit utilisation low (ideally under 30%) and making payments on time will help improve your score. On the other hand, high utilisation or missed payments can have the opposite effect.

Say you’ve got a £200,000 revolving credit facility. If you use £100,000 to cover payroll, you’ll only pay interest on that £100,000. If you repay £50,000, your available credit jumps back up to £150,000. 

But if you only make the minimum payment, interest keeps adding up on the remaining balance.

Types of Revolving Credit

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Revolving credit can be a lifeline for businesses. It helps manage cash flow, cover unexpected expenses, and seize new opportunities without the wait. Let’s break down the types of revolving credit that can keep your business agile:

Credit Cards

You probably know this one well—credit cards are one of the most common types of revolving credit. You can make purchases up to your limit, repay what you’ve used, and then access those funds again. Simple! 

But watch out for the interest rates! Credit cards tend to carry higher rates, so it’s a good idea to pay off your balance when you can. On the plus side, many cards come with perks like cashback or travel rewards, which can add up if you’re using them for everyday business expenses.

Personal Lines of Credit (PLOCs)

A personal line of credit (PLOC) gives you flexible access to funds, usually at a lower interest rate than credit cards. It’s perfect for handling personal expenses or smoothing out cash flow. You can withdraw what you need when you need it. 

And because it’s revolving, you can keep borrowing as long as you stay within your limit. Just remember: PLOCs are often unsecured, so the interest rates are typically a bit higher than secured options like HELOCs.

Home Equity Lines of Credit (HELOCs)

HELOCs are a secured type of revolving credit that lets you borrow against your home’s equity. With lower interest rates than credit cards or PLOCs, HELOCs are a popular option for bigger expenses, like home improvements or consolidating debt. 

You get a "draw period" where you can access the funds, and once that’s over, you start repaying the principal. It’s flexible, but since your home is on the line, you’ll want to make sure you can manage those payments.

Business Lines of Credit (BLOCs)

A business line of credit (BLOC) is like having an on-demand source of funds for your business. Do you need to cover payroll during a slow month? Or maybe bridge the gap between receivables and payables? A BLOC can help with that. 

Plus, you only pay interest on what you actually use, not the full amount available. Some lenders may charge fees if you don’t use the credit, but the flexibility is a huge plus when managing day-to-day operations or gearing up for growth.

Advantages and Disadvantages of Revolving Credit

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Now that you know how revolving credit works, let’s understand its benefits and possible downsides—so you can decide if it’s the right fit for your business.

Advantages of Revolving Credit

1. Financial Flexibility

Need cash fast? Revolving credit allows you borrow as much as you need, whenever you need it–up to your limit. There’s no need to reapply for a new loan, making it an ideal solution for managing cash flow gaps or covering unexpected expenses that always seem to pop up.

2. Quick Access to Funds

Once you repay what you’ve borrowed, that credit becomes available again. It’s like having a financial safety net ready to go. This is a huge advantage when you need fast access to capital—whether for daily operations or seizing new opportunities.

3. Interest-Free Periods (Credit Cards)

Many credit cards come with an interest-free period, typically between 30 and 56 days. If you pay off your balance within this timeframe, you won’t incur any interest charges. For businesses that can manage repayments effectively, this feature provides a cost-effective way to handle short-term borrowing.

4. Builds Credit

Here’s a bonus: using revolving credit responsibly can actually improve your credit score. By keeping your balances low and making payments on time, you can unlock better financing options and even lower interest rates in the future.

5. Flexible Repayments

Unlike traditional loans, revolving credit doesn’t come with a fixed repayment schedule. With revolving credit, you can make minimum payments if cash flow is tight or pay more when things are going well. This flexibility can take the pressure off during uncertain times.

Disadvantages of Revolving Credit

1. Higher Interest Rates

While revolving credit offers flexibility, it often comes with higher interest rates, especially with credit cards. If you’re not paying off your balance in full each month, those interest charges can add up quickly.

2. Risk of Over-Borrowing

With funds always available, it can be tempting to borrow more than you can comfortably repay. This could put business owners in a tough spot, especially if your business isn’t bringing in cash fast enough to cover those payments.

3. Multiple Charges

Revolving credit can come with extra fees, like commitment fees, annual charges, or non-utilisation fees. These can drive up the cost of having access to credit, even if you’re not using it regularly.

4. Lender Control

Your lender can lower your credit limit or close your account if your financial situation changes or if your credit utilisation gets too high. This could leave you without access to credit when you need it most.

5. Overdraft Costs

Overdraft protection might sound helpful, but it’s another form of revolving credit that often comes with high interest rates. While it can save you from overdraft fees, it’s not the most cost-effective way to borrow.

How to Manage Revolving Credit Responsibly

Revolving credit can be a great financial tool if you manage it right. Let’s walk through some key ways to keep it working in your favour.

Impact on Credit Score

The below two factors majorly impact your credit score:

• Credit Utilization: Think of your credit utilisation as a snapshot of how much of your available credit you’re using. Keeping it under 30% is ideal—under 10% is even better. A high utilisation rate can raise red flags for lenders, so aim to keep it low for a healthier credit score.
• Payment History: This one’s big. Your payment history makes up around 35% of your credit score. So, missing payments or paying late can really hurt your credit. The good part is that paying on time consistently helps you build a strong credit profile and opens the door to better financial options.

Strategies for Responsible Management

Want to manage your credit payments carefully? We got you!

• Set a Clear Repayment Plan: A plan is crucial. Don’t rely on making the minimum payment—try to pay off your balance in full or at least more than the minimum. This will help you avoid stacking up interest and keep your debt under control.
• Monitor Your Credit Usage: Keep an eye on how much credit you're using. Many apps and tools can track your credit utilisation in real-time, helping you stay in the safe zone. It’s easy to let usage creep up, so regular check-ins are a must.
• Don’t Over-Rely on Credit: Revolving credit is super flexible, but it’s not a long-term solution. It’s perfect for covering unexpected expenses or short-term cash flow gaps, but leaning on it too much can lead to costly debt.
• Use Credit Limit Increases Wisely: Getting a credit limit increase can lower your utilisation rate, but it’s easy to fall into the trap of spending more. If you do request an increase, be sure to keep your spending in check.
• Pay More Than the Minimum: While paying just the minimum might seem like an easy option, it can leave you paying off your debt for much longer—and cost you more in interest. Whenever possible, pay more than the minimum to get ahead.
• Check Your Statements: Don’t forget to review your statements regularly. Mistakes happen, and catching unauthorised charges or errors early can save you from bigger problems later.

Integration into Your Financial Strategy

Revolving credit works best when it’s part of a larger financial plan. Use it to manage cash flow or handle short-term expenses, but don’t let it turn into a long-term burden. Ensure it aligns with your overall business or personal financial goals, and keep borrowing in check.

If you’re juggling multiple high-interest revolving credit accounts, consolidating them into a lower-interest loan can simplify things and cut down on interest. It’s an effective way to manage debt without overextending yourself.

Why FundOnion is Your Best Option for Debt Consolidation?

Tired of juggling multiple high-interest credit accounts? Consolidating your debt into a lower-interest loan is a smart move—and FundOnion makes it quick and hassle-free.

In just 90 seconds, you can compare offers from top lenders and find the best fit for your business. No hidden fees, no complicated terms—just clear, transparent options tailored to you.

Whether looking to reduce interest rates or simplify your repayments, FundOnion helps you take control of your finances and free up cash flow.

Best of all? It’s completely free. No obligations, just smarter choices for your business.

Get Started Now!

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Conclusion

Revolving credit is a powerful tool for managing cash flow, handling unexpected expenses, and keeping your business agile. But like any tool, it’s most effective when used strategically. Keep your credit utilization low, stay on top of payments, and use credit strategically to keep your business moving forward.

And when it comes to finding the right financing options or consolidating debt, FundOnion has your back. In just 90 seconds, you can compare offers from top lenders, find the best rates, and get the funding your business needs—no hidden fees, no hassle.

Why wait? Get started with FundOnion today!

FAQs

1. How is interest calculated on revolving credit?

Interest on revolving credit is calculated daily, based on the outstanding balance you carry from month to month. This means that if you don’t pay off your balance in full, interest is only applied to the remaining amount—not your entire credit limit. 

Credit cards tend to have higher rates, typically between 20% and 30%, whereas business lines of credit often offer lower rates, around 8% to 10%. 

2. What are the typical fees associated with revolving credit?

Common fees include:

• Annual fees: Standard for credit cards.
• Non-utilization fees: If you don’t use the credit line.
• Late payment fees: Charged for missed payments.
• Balance transfer fees: For moving debt between accounts.

Review these fees to avoid unexpected costs.

3. Can you increase your credit limit on a revolving credit account?

Yes, you can often request a credit limit increase. Approval depends on your credit score, payment history, and financial health. A higher credit limit can help lower your credit utilization ratio, which is good for your credit score.

4. What happens if I miss a payment on a revolving credit account?

Missing a payment can lead to:

• Late fees
• Higher interest rates
• Negative impact on your credit score
• Possible credit limit reduction

Keep up with payments to avoid these consequences.

5. Is revolving credit available to businesses with poor credit history?

Yes, some lenders offer revolving credit to businesses with poor credit. However, expect higher interest rates and lower limits. Secured credit, such as a HELOC, maybe a better option if your credit is low.

6. What are the tax implications of using revolving credit for business?

Interest on business-related revolving credit is often tax-deductible. Consult a tax advisor to ensure you’re applying deductions correctly and maximizing tax benefits.