RCF or term loan. Which one does your business need?
A term loan hands you the whole sum at drawdown and charges interest on all of it until it is repaid. A revolving credit facility commits a line you draw, repay and draw again as the need moves, at full margin on the drawn balance and a smaller commitment fee on the rest. Neither is the better product; they are different shapes of debt, and the choice follows the shape of the need. Funding that stays in the business (an acquisition, capital spending, the permanent core of working capital) belongs on a term loan. Funding that swells and shrinks with the trading cycle belongs on the revolver, because carrying a fixed loan against a moving need means paying full interest on money that spends most of the year idle. Most facilities at £3m to £15m are built with both under one agreement, and the working question is where the line between them sits. This guide sets out the mechanics, the cost arithmetic and the structuring judgment, at August 2026 rates.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific facility. It deepens the shorter answers in our working guide.
A committed line you draw, repay and redraw for the whole term.
A revolving credit facility is a committed line. The lender contracts to make an agreed amount available for the life of the facility, commonly three to five years, and cannot walk away from that commitment unless you breach the agreement. Within the term you draw in tranches on a few days’ notice, repay when the cash comes in, and draw again when the need returns, any number of times. Interest runs at a margin over SONIA on what is outstanding, and a commitment fee runs on what is not. The committed part is the point. An overdraft is similar in shape but repayable on demand, which makes it a different instrument in substance, as the hub answer on revolving credit facilities and overdrafts sets out.
A term loan is the opposite shape. The full amount is drawn at completion, or in tranches during a short availability window where the loan funds staged spending, and once the window closes the undrawn balance is cancelled. From then on the loan only shrinks. It is repaid on a contracted schedule: amortising in instalments across the term, part amortising with a balloon at maturity, or as a single bullet at the end. What you repay you cannot redraw. Interest runs on the outstanding balance from drawdown until the loan is gone, whether the money is at work in the business or sitting on deposit.
The distinction that drives everything else on this page: a term loan finances a sum certain, a revolver finances a range. At £3m to £15m the two usually arrive together, a term loan and a committed RCF under one facilities agreement from the same lender, and the structuring decision is where the line between them sits.
A margin on drawn money, and a fee to keep the rest available.
Both facilities are floating-rate, priced over SONIA, which sat at 3.73% on 2 July 2026 against a Bank Rate of 3.75%, held at the Bank of England’s June meeting. Bank of England, Bank Rate. On a secured, sensibly geared deal a bank margin is a low single-digit spread over that reference, and the margin on a drawn revolver is typically the same as, or close to, the margin on the term loan beside it. Drawn money costs what drawn money costs. The two instruments part company on what you pay for money you are not using.
An RCF charges for availability. The commitment fee runs on the undrawn portion, by market convention around 35% of the applicable margin, so a line priced at SONIA plus 3% costs a little over 1% a year on money still on the shelf. Some agreements add a utilisation fee when the drawn balance runs high for a sustained period, and the arrangement fee on a bank deal is nearer 1%, charged on the whole commitment, undrawn included. None of these lines is large by itself; together they are the price of certainty, and they are the reason a revolver should be sized to the forecast need rather than to a comfortable round number. The full pricing stack, fee by fee, is in our guide to the all-in cost of raising debt.
A term loan charges for possession. Interest runs on the full outstanding balance from the day of drawdown, and because repaid amounts cannot be redrawn, prudent borrowers draw the whole requirement at the start. The consequence is cost of carry. Any part of the loan not yet at work sits as cash earning a deposit rate that is always below the borrowing rate, and the spread between the two is a real annual cost of holding money idle. Carry is invisible on the term sheet, which prices the margin rather than the shape, and it is the line borrowers most often miss when they compare a loan against a line.
On a fluctuating need the revolver costs a fraction of the loan.
Take a business whose working capital swells to a £4m peak in the autumn stock build and unwinds by spring, averaging £1m of funding need across the year. These figures are illustrative arithmetic at August 2026 rates, not a quote: both routes are priced at a bank all-in near 6.75% (a 3% margin over the reference rate), with a commitment fee at 35% of the margin, about 1.05% on undrawn money.
The revolver
A £4m committed RCF carries the average drawn balance of £1m at 6.75%, about £67,500 a year, plus the commitment fee on the £3m average undrawn, about £31,500. Call it £99,000 a year, roughly 2.5% of the peak requirement. In the heavy months the interest line rises and the fee line falls; over the cycle the average is what you pay.
The term loan
Fund the same need with a £4m term loan and interest runs on the full amount all year: £270,000, whatever the season. Deposit interest on the idle balance claws part of that back, but a deposit account always pays less than the loan charges, so the spread on up to £3m of idle money is a cost with nothing to show for it. Before any deposit offset the gap is £171,000 a year, and no realistic offset closes most of it. On a fluctuating need the loan is the wrong shape at any margin.
The reversal
Now hold the need at £4m all year. The revolver’s interest bill rises to the same £270,000, its commitment fee falls away, and the price argument disappears. The structural argument reverses. A permanently drawn revolver has no headroom left for the swing it was built to absorb, it will fail the annual clean-down its agreement requires, and its lender will read it for what it is: term debt wearing a working-capital label. A term loan amortising over five years repays permanent funding out of the plan, which is what permanent funding should do.
The illustration generalises. The revolver wins on a fluctuating need, the term loan on a permanent one, and the expensive mistakes are the mismatches in either direction: a loan carrying idle cash at full margin, or a line drawn flat with nowhere left to flex.
Fund the core with term debt and the swing with the revolver.
Most balance sheets at this size need both, because most funding needs have both shapes in them. The spending that stays in the business belongs on term debt: capital expenditure, an acquisition, the refinancing of existing borrowings, and the core of the working capital, meaning the level the cycle never falls below. The movement above that core belongs on the revolver: the seasonal stock build, the intra-month gap between payroll and receipts, the mobilisation cash a new contract absorbs and then returns. The standard lower-mid-market package puts both in one facilities agreement: a term loan for the sum certain, a committed RCF for the range, one lender, one covenant package, one set of security.
Where the line sits is a forecasting judgment, and it is worth real money in both directions. Set the core too low and the revolver ends up permanently part-drawn, which spends the headroom the swing needs and invites the clean-down problem above. Set it too high and the term loan carries idle cash at full margin. The working method is a monthly cash forecast across at least one full trading cycle: the minimum funding level it shows is core, and is termed out; the oscillation above it sizes the revolver, with an allowance for the plan being wrong.
Two shapes deserve a different instrument altogether. Where working capital grows with revenue, a fixed line goes stale as the business outgrows it, and a receivables-linked facility that flexes with the debtor book fits better; for an asset-heavy balance sheet, the borrowing-base route can release more than either cash-flow instrument, as our guide to asset-based lending sets out. And where spending is staged but certain, a committed capex or acquisition facility is the hybrid: drawn in tranches as the spending lands, then repaid on a term-loan profile.
One agreement and one debenture, but different pressure points.
Where the two facilities sit in one agreement, they share almost everything. The security package covers both: one debenture over the company, fixed charges on the assets that can carry them and a floating charge over the rest, as our guide to debentures and charges explains. The maintenance covenants test the whole structure quarterly, typically leverage and interest cover on net debt, and a drawn revolver counts in leverage like any other borrowing, so a heavy season can move the covenant arithmetic even while the term loan behaves.
The revolver carries two disciplines of its own. The clean-down requires the line to sit at or near zero for a short window each year, proof that it funds swings rather than a permanent hole. And every drawing is conditional: the agreement repeats its representations each time you draw, so a default, or on some agreements a material adverse change, can block new drawings even where nothing has been accelerated. On a performing credit that risk is remote, but the mechanism matters, because the committed line is committed subject to conditions, and the moment of maximum need is the moment the conditions get read. In covenant-loose fund structures the point inverts: the financial covenant often springs only when the revolver is drawn past a threshold, so the revolver is the tripwire, as our comparison of unitranche and bank senior debt covers.
The term loan’s pressure point is the schedule. Each amortisation payment is a hard obligation, so the test that binds is cash-flow cover: whether the business funds interest and instalments together out of the cash it generates. On exit the positions differ too. Most bank term loans can be prepaid at par, and a revolver repays and redraws freely by design, which is one reason the pair suits a borrower who expects to delever; what prepayment costs on other structures is in the hub answer on early repayment and what it costs.
An undrawn line is insurance, and some businesses are over-insured.
The commitment fee runs whether or not you ever draw. At the illustration’s pricing, a £4m line that stays undrawn all year costs about £42,000, every year, for certainty that was never called on. A business with flat, predictable cash flows, monthly invoicing on reliable payers and a cash buffer on the balance sheet may need nothing beyond a small overdraft for transient movements, and for it the committed line is insurance against a risk it does not carry. We have told borrowers to drop the revolver and bank the fee, and it is the right call more often than lenders suggest.
The term loan has its own counter-case. Where the sum is not yet certain (a phased capex programme, an acquisition pipeline that may or may not convert) drawing the whole amount on day one buys carry cost for optionality that a committed capex facility, drawn in tranches as the spending lands, provides more cheaply. And where the need may never crystallise, the honest answer can be to raise nothing yet: capacity left unused is capacity still available, as our guide to how much your business can borrow argues from the other direction.
The counter-case runs out where the risk is real. A business with customer concentration, real seasonality, or contracts that demand mobilisation cash at short notice should carry the committed line and treat the fee as the premium on a policy it expects to claim on. Paying roughly 1% a year on undrawn money to avoid being a forced seller of anything in a tight month is usually a good trade; paying it out of habit is not.
The pair matures together, and the runway protects the revolver.
Term loan and revolver are usually coterminous: one maturity date, one refinancing. The revolver’s commitment ends at that date like the loan’s, and its certainty decays ahead of it. Once maturity is inside a year the debt reads as short-term to everyone who looks at the balance sheet: auditors, credit insurers, larger customers running supplier checks. A business that runs its trading cycle on a committed line cannot afford a gap between commitments, which is why the refinancing starts on the term loan’s clock but is disciplined by the revolver’s. Our guide to refinancing timing puts the runway at twelve to eighteen months before maturity, and the revolver is the reason to respect the early end of it.
Refinancing is also where a mis-shaped structure gets corrected, at the borrower’s expense if it arrives unprepared. A revolver that has run fully drawn for two years will be read by every incoming lender as term debt, and repriced and restructured as term debt, whatever the expiring agreement called it. Better to term it out on your own initiative, with a forecast that shows the true core and swing, than to have the correction imposed in a maturity negotiation with no alternative lender in play. With a heavy stack of mid-market maturities refinancing across 2026 to 2028, borrowers who present a clean shape early will price better than those who arrive late with a permanently drawn line, as our guide to the UK refinancing wall sets out.
We will put your numbers to both shapes.
If you are weighing a term loan against a revolver, or sizing the split between them, a first conversation is confidential and costs nothing. We build the monthly forecast that shows the core and the swing, price the structure that fits it across the market, and tell you plainly where a committed line is worth its fee and where it is not. See how a mandate runs in how we work, or the full range of what we advise on in our services.