Open credit facilities are a popular form of finance for SMB owners. They offer flexible funding with relatively few restrictions or red tape. 

But despite their popularity, open credit lines are often misunderstood and, worse, mismanaged. 

So how do they really work, and when should you consider using one? More importantly, are there better options out there? 

This article helps you answer these questions by unpacking this common funding source and comparing it with the main alternatives. Then we’ll share an even quicker, more flexible solution designed for today's SMBs.

What is open-end credit?

An open credit facility is a flexible financing mechanism that gives you access to a pre-authorized sum of money to use in whole or in part, at your own pace. Also known as “revolving credit,” it’s a contract under which a bank agrees to make cash flow to a company for a given period. The company can use it, repay it and reuse it freely within the agreed limits.

Unlike a traditional loan, there is not a cash advance upfront. Instead, it is a right to draw down from a pool of funds, which the company can use as it sees fit.

It’s a cash management tool used to deal with unforeseen circumstances, to finance delayed payments, or to manage seasonal peaks in business activity.

How does open-end credit work?

Open credit facilities usually involve the following key elements:

• Authorized amount: Capped according to the company's financial capacity (e.g. €50,000).
• Term: As agreed. Often 12 months, and renewable.
• Free use: Within the authorized limit, the company can make withdrawals at any time.
• Repayments: Flexible, often based on cash inflows.
• Interest: Only charged on amounts actually used (not on the entire available pool).
• Ancillary charges: Sometimes includes commitment or non-utilization fees.

Practical example

You’re a small business with mostly local clients. You obtain an open credit facility of €30,000. You draw €10,000 in February to pay a supplier, then repay €5,000 in March after collecting a customer invoice.

• You pay interest only on the €10,000 used in February, then on the remaining €5,000 in March.
• You still have €25,000 left to use at any time.
• If you repay the outstanding €5,000, you’ll have the full €30,000 available for future use.

When is revolving credit suitable for SMBs?

Each form of short-term financing is designed for use in specific circumstances. Here are the most common situations in which this type of financing makes sense:

Cash flow shortfalls

For example, an SMB in the construction industry is waiting for payment of several customer invoices, but has to pay its own suppliers within 30 days. If the amounts are low and the fees are reasonable—and it’s confident those customers will pay soon—the SMB could use open-ended credit to pay right away.

Management of unforeseen events

Suppose a food processing company suffers a machine breakdown and needs to quickly release €8,000 for repairs. Without the machine, it can’t process or sell any goods. So access to this quick funding source is a vital lifeline. 

Seasonal cash management

An SMB in the events sector could open a line of credit ahead of the high season (May-September), then repay it at the end of the summer. This credit line is a tool to use throughout the season as the unexpected arises, rather than a core source of working capital which it needs to operate in the first place. 

Financing a short-term need without a structured project

While it’s not wise to borrow money without a clear structure, the conditions for open-end credit can be lighter than traditional bank loans. You may not need to present a business plan, for example. This typically makes it faster and easier to obtain in times of need. 

What are the conditions for obtaining open-end credit?

Lenders typically look at a number of criteria:

• Age of the business
• Recent financial situation (balance sheet, profit and loss accounts)
• Banking history (incidents, regular overdrafts)
• Estimated repayment capacity
• Some banks ask for personal guarantees, or even a pledge of receivables.

On average, it takes between 10 and 20 days to obtain a credit line, and the documents to be provided may vary from bank to bank.

What are the alternatives to open-end credit?

Although a revolving credit line is flexible, it’s not always the quickest or most suitable solution. Here are some of the most common alternatives for SMEs:

1. Factoring

• The principle: Sell your customer invoices to a factor, who advances you the funds.
• Advantages: Rapid financing, using those invoices as security. And the factor usually handles collections, so those invoices are no longer your problem.
• Limitations: Reserved for invoices that have already been issued; costs are often high.

2. Financing supplier invoices (reverse factoring)

• Principle: A third party pays the supplier immediately, and you repay later.
• Advantage: Secures the supplier relationship and keeps you moving.
• Limitation: Requires a three-way agreement with a principal, which can be difficult to agree.

3. Conventional business loan

• Principle: Fixed amount, repayment schedule.
• Advantage: clear agreement, fixed rates, and loans are easy to understand.
• Limitation: longer, inflexible procedure. And you often can’t use the loan as you please.

Why Defacto is an ideal alternative

Defacto fulfils the same role as open-end credit lines for SMBs, but with three major advantages:

• Faster: Eligibility is checked automatically, with no file to put together. Less than 30 seconds to receive a response.
• More flexible: You choose when to use the funds, and for how long. No penalty for early repayment.
• More accessible: We finance businesses that are often ineligible for traditional loans: young, fast-growing, or poorly understood by traditional players.

Check your eligibility here, in seconds. 

Real-life example

An SMB in the agri-food sector needs to bring forward the purchase of raw materials to meet an order. It connects its accounting data to Defacto and submits a supplier invoice for €12,000. Payment is made the same day. It reimburses 45 days later, once the sales have been made.

Conclusion

Opening a credit line is a classic solution well known to SMB owners. But in an economic context where speed and flexibility are essential, it’s not always the best option.

Whether you’re an agency, a retailer, or a manufacturer, your cash flow requirements can change quickly. Sometimes too quickly for the traditional banking system.

Fortunately, there are alternatives.

At Defacto, our mission is to make financing simple, fast and accessible for SMBs. By cutting out the red tape, reducing the turnaround time to just a few seconds, and by adapting to your actual cycles—not your bank's.

‍Test Defacto today. No commitment. No wasted time.