Revolving credit is a flexible financing solution that gives businesses (and individuals) a cash reserve they can draw on at any time. Unlike a traditional loan, this type of credit is renewed as repayments are made, offering significant flexibility in managing cash flow requirements. 

Its main advantage lies in that flexibility. Businesses can respond to the unexpected or seize growth opportunities without having to apply for new finance every time they need it. 

But while revolving credit can be a valuable tool, it also carries risks that should be fully understood before committing to it.

Let's explore the benefits and precautions of using revolving credit to best effect, as well as the alternatives that may be available to businesses depending on their specific needs.

What is revolving credit?

Revolving credit is essentially a pre-approved fund made available by a financial institution. You can draw on this reserve according to their needs, provided you don’t exceed the authorized limit. Each repayment made restores the amount available, creating a continuous cycle of credit use. 

This dynamic means that revolving credit can be used repeatedly, without the need for a new loan application. Conventional credit, on the other hand, has a fixed amount and a predefined repayment schedule. 

Revolving credit gives the borrower greater flexibility. But it’s important to note that this flexibility brings additional costs. Interest rates are generally higher than those for a loan, which can make this type of credit expensive in the long term. And careless management can also lead to excessive debt and financial difficulties.

Legal framework and obligations

Revolving credit is subject to a strict legal framework in France and elsewhere, designed to protect borrowers against the risk of abuse. The specifics may change from jurisdiction to jurisdiction, but the rules usually include the following. 

All advertising for this type of credit must typically include a clear warning of the associated financial commitments. 

Before taking out credit, borrowers receive a pre-contractual information sheet detailing the terms and conditions of the offer. Financial institutions are also obliged to assess the borrower's creditworthiness before granting revolving credit. 

This involves a careful examination of income, charges and other outstanding loans. Once credit has been granted, an annual review is required to check that the borrower is still able to repay the debt. In addition, the borrower will usually have a 14-day cooling-off period to cancel the contract without having to justify their decision.

If the revolving credit remains unused for an extended period—usually three years—the credit institution must convert it into an amortising loan to avoid unnecessary costs. This measure is designed to protect consumers from the costs associated with inactive credit.

Why and how to use revolving credit

Revolving credit is particularly suitable for businesses facing cash flow fluctuations. For example, a retail company might use it to finance stocks during peak seasonal demand, while a startup in its growth phase might use it to meet unexpected expenses without disrupting its core financing.

However, to maximize its effectiveness, it should be used for specific, one-off needs rather than for ongoing expenditure. Wise management also requires rapid repayments to limit interest charges and avoid excessive debt.

Responsible management of revolving credit

Responsible management of revolving credit requires rigorous planning of repayments and a precise assessment of financial needs. This credit should be reserved for one-off needs to avoid excessive recourse to debt. It is essential to compare the offers available, taking into account the interest rate, ancillary charges and repayment terms.

The flexibility of this credit is a major advantage, but it can also lead to excessive use without close monitoring. You must track account balances and expenditure to control cash flow and limit interest charges. 

And always negotiate the credit terms with the lending institution to obtain the best conditions and reduce the associated costs.

Alternatives to revolving credit

In some cases, revolving credit may be unsuitable or too expensive. In such cases, other alternatives may be considered. An amortising loan, for example, often offers a better interest rate and greater visibility over the repayment schedule. It is often better suited to long-term needs, but has the disadvantage of being less flexible than revolving credit.

Another interesting alternative for businesses is a working capital credit line. It provides a degree of flexibility, while generally offering more favourable terms than revolving credit. Lines of credit are often better suited to short-term financing needs and structured investments, such as stock purchases or cash management.

To help you find your way around, here is a comparative table of the different types of credit 

mentioned together:

Revolving credit

• How it works: Credit made available, usable at will within a given limit, with gradual replenishment
• Repayment method: Replenished as repayments are made
• Term: Often no fixed term
• Use of funds: Ideal for current or unforeseen expenses
• Interest rate: Often higher because of flexibility
• Access and conditions: Easy to access with flexible criteria
• Advantages: Flexibility, quick access
• Disadvantages: High interest rates, risk of excessive debts

Business loan

• Type: Fixed amount and defined repayment schedule
• Repayment method: Repaid according to pre-agreed deadlines
• Term: Generally with a fixed maturity
• Use of funds: Used for long-term needs (e.g. purchase of property)
• Interest rate: Lower, fixed rate
• Access and conditions: More formal access, in-depth analysis of repayment capacity
• Advantages: Lower rate, predictability of repayments
• Disadvantages: Less flexible, requires regular payments

Credit line

• Type: Amount fixed in advance, can be drawn down in full or in part
• Repayment method: Replenished on new application or according to negotiated terms
• Term: Often with no fixed maturity, according to negotiated terms
• Use of funds: Ideal for short-term cash requirements
• Interest rate: Rate often negotiated according to risk
• Access and terms: More flexible than amortising credit, but requires risk assessment
• Pros: Flexible and quick access to funds
• Disadvantages: May be less accessible for small businesses

Defacto

• Type: Rapid financing with structured repayment
• Repayment method: Clear repayment structure, can be repaid any time
• Term: Flexible, depending on business needs
• Use of funds: Rapid financing for specific needs
• Interest rates: Predictable rates and transparent conditions
• Access and conditions: Fast access with a simplified platform
• Advantages: Fast, clear structure, no fluctuating rates
• Cons: Less flexibility than revolving credit, but more transparent

Defacto: a simple, flexible alternative

Faced with the limitations of revolving credit, Defacto offers a more transparent financing solution tailored to the needs of businesses. It provides rapid access to cash with clear repayment terms, without the constraints of fluctuating rates and automatic renewals of revolving credit. 

The platform makes the application and any ongoing admin simple, and offers more controlled and flexible cash management.

In a nutshell

Revolving credit is a flexible and useful financial tool for meeting occasional needs. But you need to be particularly careful when managing it, because interest rates can quickly become. Good planning and an in-depth analysis of the alternatives are essential if you are to take full advantage of this financing solution. 

Among the alternatives, Defacto stands out as an interesting option. It lets you avoid the disadvantages of traditional revolving credit while benefiting from flexible cash flow and simplified management.

To find out more about alternative financing solutions, take a look at the offers available from Defacto and explore how this solution can improve your cash flow management.