Revolving Trade Finance

A revolving trading facility is a form of funding that offers a highly flexible financial solution for businesses that need to meet fluctuating costs.

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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.

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.

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