Revolving Trade Finance

What is revolving trade finance? Let’s find out so you can better understand business finance.

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In modern commerce, flexibility is the key to success. Being able to adapt to changing market conditions and take advantage of new opportunities is vital for any business, and it’s absolutely essential that companies have a flexible financial solution in place that enables them to meet the needs of a changing marketplace. A revolving trading facility is the perfect answer for businesses who need reliability and flexibility in one neat package, because this form of finance enables businesses to take as much capital as they need, but only when they need it. This minimises unnecessary costs while maximising the potential for growth, and helps to even out the ebb and flow of a business’s bottom line.

While a revolving trading facility is often an essential part of a business’s long-term financial strategy, it’s important to seek out professional advice from an experienced financial advisor before committing to any financial product. Even though this form of finance allows borrowers to pick and choose how much they need to borrow, they will still be expected to repay their loan with interest. This financial solution is not appropriate for every situation, so businesses must carefully consider whether this is the right option for their circumstances.

How does a revolving trading finance work?

At its core, a revolving trading facility is basically a large overdraft for commercial enterprises. There are several similarities to a small-scale consumer overdraft; the borrower is entitled to borrow as much money as they need up to a pre-agreed threshold without applying for a loan, and they will pay interest on the total balance they are using at the end of each month.

This is an extremely useful option for many businesses because it allows them to absorb unexpected costs at short notice, and to bridge the gap whilst waiting for outstanding debts to be repaid. Generally, the financial institution providing the revolving trading facility will assess their client’s overall creditworthiness and assign them a credit limit; this is the maximum amount they are able to draw down at any one time. This figure is usually reviewed every year to ascertain whether it’s sustainable, and whether it meets the borrower’s needs.

Because a revolving trading facility provides immediate access to extra funds it can be an essential part of a business’ financial architecture. However, it’s important to bear in mind that there is always a cost attached; generally speaking there will be a monthly service charge for providing the facility as well as interest to be paid on any outstanding balance. The benefits often outweigh the costs, but it’s important for businesses to check the numbers before deciding to take out a revolving trading facility.

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Using a revolving trading facility

A financial solution like a revolving trading facility is exceptionally useful because of its sheer flexibility; it enables businesses to quickly meet upcoming expenses without having to negotiate costly loans at short notice, and since there are no time limits or terms to meet the loan can be repaid at a time that suits the business’s needs. Here are just a couple of the ways in which a revolving trading facility can be a valuable part of a business’ trading strategy.

Bridging Income and Expenditure

Many businesses submit invoices to their customers with a 30-day payment term, which means that although they’ve incurred costs to turn around an order, they won’t receive any money immediately. Instead, they must wait until their client decides to pay, which can take several weeks - meanwhile, wages need to be paid and mortgage payments met. A revolving trading facility allows the borrower to borrow as much as is necessary to meet these ongoing costs whilst awaiting the payment of invoices. Generally speaking the facility will be calibrated to minimise the balance outstanding at the end of each month, minimising the amount of interest payable.

For instance, a printing firm may have a £250,000 revolving trading facility which they use to pay their monthly overheads, and they maintain the balance of this facility by making repayments when invoices are paid.

Investment and Expansion

A revolving trading facility provides an easy method for businesses to acquire capital in a short space of time, and doesn’t require lengthy application processes or additional security to be provided. This means that if it should be necessary to raise capital quickly, the business can easily put together the required funds - while they will then be liable for higher costs on the money they’re drawing down, this can be more than offset by the benefits which can be reaped through further investment.

For example, the printing firm from our previous example might be offered a contract by a major buyer which requires them to invest in some heavy-duty equipment. Rather than securing a separate loan for these machines, they can simply make the initial purchase with their revolving trading facility and begin processing the order; the profits from this contract will be well worth the cost incurred through their borrowing. They are also free to refinance the machinery if necessary, through the use of bridging loans or asset finance.

Terms of a Revolving Trading Finance

While each and every lender will offer different services, there are some common attributes that a revolving trading finance will have. Businesses will need to understand what the costs of the facility will be, and how these will be calculated; is there a standing monthly fee for using the facility, an interest rate on money drawn down, or a combination of both? Likewise, borrowers must check what the conditions of their borrowing are, and whether there are any restrictions on what they can and can’t do with their money.

Generally speaking, lenders will review the facility annually to ensure that the service they’re providing is adequate for their client’s needs. If the borrower is using very little of the facility, they may decide to reduce the maximum threshold, while if they’re constantly borrowing up to their maximum the lender may decide to raise this threshold.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

What can a business bridging loan be used for?

A business bridging loan can be used for a huge variety of different purposes. Most commonly they are used for major purchases such as property, for new equipment and machinery as well as to acquire stock. They can also be used as working capital and by new businesses that require a cash flow injection.

What can be used as security against business bridging loans?

 A vast majority of businesses will use property or land as security when taking out a bridging loan. There are however a small number of specialist lenders that are prepared to secure bridging loans against equipment, the value of unpaid invoices and projected future sales or even against equity in the business.

What types of companies can use business bridging loans?

Business bridging loans can be an ideal solution for small, medium or large companies including sole traders, LLP partnerships and limited companies. Some specialist lenders will also lend to offshore limited companies, SPV’s and Trusts.

What types of commercial property can business bridging loans be secured against?

With a huge variety of lenders to choose from in today’s market pretty much all types of commercial property will be acceptable including commercial units, mixed use properties, offices, care homes, leisure complexes, farms, retail units, restaurants, pubs, land with or without planning permission and much, much more beside. Business bridging loans are also ideal for commercial property in a poor state of repair, non-standard construction property and once again much more besides.   

Can business bridging loans be obtained on both a 1st and 2nd charge basis?

Yes. Whilst not as widely available as 1st Charges some lenders will happily write 2nd charge business bridging loans.  

Can business bridging loans be used by both onshore and offshore companies?

Yes, they can. They can be used by a huge variety of companies as detailed above and by foreign nationals who can struggle to get High Street Finance.

Talk to our business finance experts.
Call us on 0207 043 5271

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