Your SME can flourish with revolving credit – but what are revolving loans, and how do they work?
Running a small business is no easy feat – especially not in an unpredictable economic environment like South Africa.
The good news is that revolving loans are a flexible lending mechanism that is helping entrepreneurs hop over financial bumps and seize sudden opportunities right now.
But what is a revolving loan? And why is this type of loan interesting for South African business owners?
This article covers the ins and outs of a revolving loan in South Africa. Read on to find out how it works, what the key advantages are, and whether revolving loans fit your business type and cash flow challenges.
Don’t let cash flow hold back your business. Get in touch with Lula today to learn how you can quickly set up a revolving capital facility.
Why access to credit is important for South African SMEs
Good credit access keeps small and mid-sized enterprises’ (SMEs) cash flow healthy, despite challenges like power outages, labour strikes, rising material costs, or delayed client payments.
No access to credit, on the other hand, can mean your SME goes belly up.
Lack of access to funding was the biggest reason (25.2%) for SA entrepreneurs closing their businesses, the yearly Global Entrepreneurship Monitor (GEM) Survey shows.
Source: GEM
But with higher interest rates and stringent eligibility criteria, SMEs have a hard time accessing business loans, the OECD concluded in 2022. SME lending makes up a fraction of total business loans, despite small businesses making up 98% of registered companies nationwide.
Source: OECD
With business loans inaccessible, 35% of South African SMEs rely on personal loans, as business news outlet Zawya reports.
Yet as conventional business credit and personal loans come with poor repayment terms and low loan amounts, more SMEs are turning to smart financing solutions like revolving loans.
Also called a revolving credit facility, it’s a flexible financial service that provides business owners with a replenishable line of credit.
Think of it as fast and easy access to working capital when you need it most. But what is a revolving loan facility exactly, and how does a revolving loan work?
More importantly, can this finance provide the quick and easy access to capital that SMEs need to stay afloat and competitive in today’s turbulent South African market?
What is a revolving loan and how does it work?
In short, a revolving loan is a type of credit that you can withdraw and repay as many times as you want.
Unlike traditional term loans that have fixed monthly repayments over a set period of time, revolving loans have no set term.
A revolving loan typically comes in two forms.
- Revolving lump sum
Here, you receive a lump sum of money upfront, similar to a traditional loan, but you have the flexibility to borrow and repay within the credit limit as many times as needed. Interest is usually charged on the outstanding balance.
- Revolving Line of Credit
This is a flexible borrowing arrangement where a lender provides you with access to a certain amount of funds, known as your credit limit. You can borrow and repay funds as needed, up to that limit.
Think of it like having a credit card where you have a credit limit and can make purchases up to that limit, paying interest only on the outstanding balance.
Those are the basics of revolving credit, but you might still ask yourself “What is a revolving loan fund?”. This simply covers the maximum amount of money you have available, be it a lump sum or a line of credit.
Definition: A revolving loan is a replenishable line of credit that allows borrowers to access funds up to a set credit limit, repaying and reusing the loan amount when needed without having to reapply.
For a better understanding of how this type of loan works, let’s further break down the key components of a revolving loan.
Repayment structure
As you make withdrawals, interest is only charged on the outstanding balance and not on the entire credit limit. This makes revolving loans a particularly cost-effective solution for working capital needs, as you only pay interest on what you use.
The flexible repayment structure of a revolving loan allows you to make minimum payments or pay off the entire balance as a lump sum, depending on your cash flow situation.
Once you pay off your outstanding balance, you can again borrow available credit without having to reapply for a loan.
Interest rates
Revolving loans usually have variable interest rates, meaning higher or lower interest rates depending on the financial market, the applicant’s credit history, and the lender‘s policies.
Some lenders may also charge fees, like an annual fee or withdrawal fee. For these reasons, it’s essential to understand the loan terms and conditions before accepting a revolving loan offer.
Interest is typically calculated daily based on the outstanding balance. The more you borrow from your credit limit, the higher the interest charges will be.
Eligibility criteria
While every credit provider has their particular eligibility criteria for a revolving loan, these typically include your SME’s annual revenue, time in operation, and industry. When applying for a revolving capital facility, make sure to have the necessary documents to support the numbers.
Your credit score and overall credit history are also factored into your eligibility for a revolving loan, as well as for setting a credit limit and interest rate.
Lenders use this information to assess the risk of lending to you, so maintaining a good credit score is essential. A healthy credit history will get you better rates.
The Advantages of Revolving Loans for SMEs
Now that you understand the basics of revolving loans, let’s further break down the key advantages this type of credit offers for small businesses operating in South Africa.
- Quick access to funds
One of the biggest advantages of opening a revolving capital facility is the speed at which you can access funding. Once set up, depending on who your funder is, this can provide access to capital in a matter of hours. Traditional loans, on the other hand, can take weeks or months to get approved – if at all.
- Flexible repayment
With revolving loans, you decide whether to pay a lump sum to reset your credit account or to make a minimum repayment. This flexibility is particularly helpful for businesses with irregular income streams.
- Cash flow management
With access to a revolving credit facility, cash flow worries are a thing of the past. You can draw down funds to fill in cash flow gaps and manage operational expenses more efficiently.
- Lower cost of capital
While the interest rate or set fees on a revolving line of credit can vary and might be higher than that of a traditional term loan, it’s usually lower than on a credit card – the financial service that most resembles a revolving loan. You can also pay off the loan amount early to reduce the interest paid and the total cost of capital.
What types of SMEs can benefit from revolving loans?
Revolving loans offer several advantages over traditional short-term loans for many types of businesses. Here are some examples.
- Businesses with fluctuating cash flow
Your SME might have seasonal sales or experience short-term cash shortages, causing fluctuating cash flow. In this case, a revolving loan can help balance out your cash flow.
- Growing businesses
Revolving loans are great for growing SMEs that could use funding but don’t want to commit to the full loan amount right away. This type of loan gives full autonomy over the borrowed amount and, in turn, the interest paid.
- Businesses seeking financial control
SMEs that want to increase their financial management capabilities can use revolving loans to better plan operational expenses, and respond to financial needs and growth opportunities promptly.
Are revolving loans good for your business?
So what is a revolving loan again, and is it good for your business?
A revolving loan is a replenishable line of credit. This type of flexible funding can be an effective way to manage cash flow and increase profitability for many South African SMEs.
To answer the second question, it’s important to consider their pros and cons for your business.
This type of loan offers much more flexibility than other loans, as well as quick access and the ability to better manage your cash flow.
On the other hand, it does tend to come with higher interest rates than traditional term loans and can thus be more costly when mismanaged.
Things to consider before applying for a revolving loan are your SME’s current and projected cash flow, the intended use of funds, and the overall cost of the loan.
Your cash flow might look choppy over the short term – but if your SME is profitable and has good long-term finances, revolving loans can help you take your business to the next level.
How does a revolving capital facility work at Lula?
In South Africa’s lending industry, Lula’s revolving capital facility solution stands out as an accessible and flexible funding solution.
This innovative financial service does away with all the paperwork normally required from lenders.
The key features of Lula’s revolving capital facility are:
- Access up to R5 million in pre-approved funds without the need to reapply ● An option to easily increase the credit limit
- No monthly account or admin fees
- Flexible repayment terms with no penalties for early repayment
What do you need, to apply to Lula’s Revolving Capital Facility?
Whereas banks need lots of paperwork and time to assess your application, opening a Revolving Capital Facility with Lula is quick and hassle-free.
The online application requires basic personal and business details along with just three months of transactional data through the secure linking of your business bank account.
Ready to straighten out your finances? Open a Revolving Capital Facility with Lula today and fund your SME when you need it. We offer up to R5 million in funding without early repayment fees.
