What is revolving line of credit?
A revolving line of credit refers to an always-available credit that a bank or a merchant offers to individuals or corporations. It is indefinite, but it depends on how you keep your promise to repay it.
How does a revolving line of credit work?
If a lender agrees to lend you a certain amount of money repeatedly, then you have gained a revolving line of credit. The limit that the lender offers stands as the credit line. However, you can use the full amount or a lower amount.
At the end of every month, the lender gives a bill of the balance. If you pay the balance in full, then the lender offers it again as credit. The higher the amount you pay, the higher the amount of credit that you will get.
A partial payment of the credit means you will pay the interest on the balance. If you default, then your credit scores drop, and there is a high likelihood that the lender will cease to provide the credit.
Revolving versus nonrevolving line of credits
The revolving line of credit offers you several benefits that the nonrevolving line of credit does not offer. To begin with, you get a chance to borrow indefinitely. Thus, you do not undergo an evaluation to assess your creditworthiness when you reapply for the credit.
The next benefit entails increasing your credit limit. Similar to how the credit card limit increases, you can also increase your credit line after a certain period of using the credit.
However, you will have limited borrowing power, and you will also pay a high interest than a person takes a nonrevolving loan.
Types of revolving lines of credit
Short-term revolving line of credit
This credit has a repayment period of up to 18 months. It is usually available for people with lower credit scores, and it is a small business loan ideal for startups. Even though lenders process the credit quickly, it is expensive.
It is one of the most expensive revolving credit products in the market.
Medium-term revolving line of credit
This credit product has a repayment loan of 1-5 years. It also has a higher amount of up to 7 figures. Thus, you can use it to meet your high capital needs.
However, the credit attracts a strict qualification criterion. Also, your credit rating should be above 600. Last, your business should generate high revenue, and it should have existed for some time.
You should expect a delay after applying for this credit because the lenders take their time when assessing your application documents. But, you will pay a lower rate of interest and get a less-frequent rate of repayment.
Business credit card
The business credit card differs from a charge card because you have to pay a full amount of credit when using a charge card. However, a business credit card allows you to make partial payments that become your available balance. But making partial payments makes you pay interest on the remaining balance.
Even though you cannot get a high amount of money when using a business credit card, its flexibility makes it an ideal small business financing option. Also, the strength of your finances enables you to get a credit card faster.
Secured versus non-secured revolving line of credits
One difference between the secured and non-secured revolving line of credit is that the earlier requires collateral while the latter does not require security. Alternatively, a lender can opt to place a lien on your assets when giving you a secured revolving credit.
If you default making repayment for secured revolving credit, then the lender can sell your assets to recover the secured credit.
An unsecured revolving credit, it requires you to sign a personal guarantee. Alternatively, you can agree to the use of a blanket UCC lien. The two options seek to minimize the lender’s risk.
The interest rate of the non-secured credit is higher than the rate applicable for the secured credit.
Pros and cons of a revolving line of credit
The first advantage of revolving credit is that you will always have money. You will not need to make a fresh application, but you will borrow against your existing line whenever a business need arises. Thus, you will achieve peace of mind knowing you can access money anytime.
If you secure your small business line of credit, then you will lower its interest rates. Thus, use your assets to secure the revolving credit.
You can also get a line of credit when your credit scores are low. All you need to do is to provide a collateral or business plan.
However, a revolving credit line has a high-interest rate than common loans. You also need to pay a commitment fee. Last, you will get a lower amount compared to other alternative loans.
How to apply
To apply for a revolving credit line, you need to have a credit score above 600. A score higher than 700 enables you to negotiate the interest rate with your bank.
Also, your business needs to have run for a few years.
Last, your business needs to make at least $25,000 every year.
If you meet the discussed criteria, then you can approach a lender and apply for the credit line.
Summary
Your small venture requires a business line of credit. You will not only have cash whenever you need it, but also repay the credit flexibly. How about applying today?
