Business Line of Credit vs. Revolving Credit: What’s the Difference?
It’s not surprising to hear line of credit and revolving credit used interchangeably sometimes; however, this isn’t quite accurate. Actually, a line of credit might offer revolving credit, but it also might not. The simplest way to introduce these two terms is to say that revolving credit is one kind of credit line. The difference between a business line of credit vs. revolving credit really depends upon what happens to your company’s available credit balance after you make a payment toward your existing debt.
Revolving Credit for Business
Small business credit cards offer one of the most common examples of revolving credit lines for business; however, it’s also possible to establish this kind of financing through different types of financial companies.
The finance company will give your business a maximum limit that you’re allowed to spend. Of course, they will also charge interest on anything that you do spend that isn’t repaid before the grace period ends. You aren’t compelled to spend anything, but you also aren’t allowed to spend more than the maximum credit line you’ve been granted by the finance company.
You can use your credit to make purchases or pay bills. Both your spending and interest charges will reduce your available credit. If you make a payment that reduces or eliminates your balance, your available credit gets refreshed again.
A simple example might help illustrate how this type of credit works:
- Company “A” has a maximum credit limit of $10,000. Over time, the company spent $475 and had been charged $25 in interest.
- Before making a payment, the company’s available credit has been reduced to $9,500. If the business pays everything they owe, the loan company will reset their available credit back to $10,000.
- In some cases, Company “A” might choose to only repay part of the balance, so the available credit would only be restored by the amount of that payment. Of course, future charges for interest on unpaid balances and new spending could reduce available credit again.
- From time to time, the loan company might increase the credit limit for companies with good payment histories. Alternatively, they could decrease limits for businesses that don’t manage credit well.
How to use revolving credit: A revolving line of credit offers companies a flexible way to manage their cash flow. It may also offer businesses a lot of convenience because it’s easier to simply charge some expenses for faster payments or to keep track of all spending in one place. When companies can rely upon revolving credit, they might also be able to take advantage of opportunities to reduce expenses or increase revenue by making timely purchases that they don’t have cash for.
Understanding Non-Revolving Credit Lines
How does a business line of credit that isn’t revolving work? In most ways, it will work very similarly to revolving credit. It’s possible to use the credit limit to make purchases and pay bills. The business does not have to use the entire loan, or it might stretch out spending the maximum credit limit over time. Payments and interest charges depend upon the loan terms and amount of credit used.
The main difference is that the available balance only decreases, and it won’t get refreshed again after the company makes payments. The business gets to use up their credit limit, and then the finance company closes the account. To get more credit, the company might have to reapply for a new credit line. It’s very likely that companies can obtain more credit if they establish a history of using the initial loan wisely.
Unsecured and Secured Credit Lines
A business could seek either an unsecured or a secured credit line. The borrower may use property or another asset as collateral for a secured credit line. While this can put that asset at risk in case of default, it’s usually also cheaper to borrow that way. Some lenders may also offer loans to borrowers with poorer credit if they can secure the loan with an asset. This gives businesses a way to use the equity in their assets without actually having to sell them.
Can Lines of Credit Help Businesses?
Naturally, finance companies charge interest. It’s important for businesses to make a solid credit management plan in order to avoid running up concerning amounts of debt. It’s also a good idea to shop around for favorable interest rates, payment cycles and other terms. Companies that do a good job of managing credit will have more choices than businesses with poor credit do. However, some lenders will consider businesses that don’t have excellent credit; it’s just likely that those companies will have to pay higher interest rates than those that can maintain a good credit history.
Businesses can take advantage of their line of credit by using it to weather financial difficulties. In the best cases, they may use it to increase revenues or reduce costs. For example, a company might have a chance to buy cheaper inventory in bulk or add more space for their showroom. Maintaining a credit line and managing it properly can be critical to business growth and profitability.