A revolving line of credit is a type of loan that allows you to borrow money when you need it and pay interest only on what you borrow. Then, if you repay any borrowed funds before the end of the draw period, you can borrow that money again. This is what makes a line of credit revolving.
Revolving lines of credit are great tools for your business if you need working capital periodically to finance your company’s growth or ongoing operations. They’re also ideal if you’d like to borrow against your assets to cover expenses or refinance high-interest debt.
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A revolving line of credit is a loan typically secured by real estate or other collateral – but not always. When you receive a revolving line of credit, the line is divided into two parts: a draw period and a repayment period.
SBA Express loans are a type of SBA loan that lets businesses borrow money and use it as a revolving line of credit or a term loan. These loans are excellent debt consolidation options.
A line of credit and a revolving line of credit have similarities and differences. Both are asset-based loans typically secured by property or another asset. Both options charge interest only on the money you borrow for your company against the line, and you are responsible for interest-only payments on the outstanding balance.
The biggest difference between a line of credit and a revolving line of credit is that a revolving line allows you to reborrow any money you use against the line and subsequently pay back during the draw period. A line of credit that isn’t revolving does not have this feature.
Because a nonrevolving line of credit does not allow you to borrow the same funds a second time, this may also impact the length and structure of the loan’s draw period. It also makes the line inherently less flexible for your business needs.
Though a revolving line of credit is a fairly specific loan class, these are some typical types of revolving lines of credit. Most are relatively similar and require pledging collateral worth more than the loan amount – but not all of them.
While most of these examples are similar, credit cards stand out. Though they are technically revolving lines of credit, funds borrowed with credit cards are almost always unsecured loans (except for secured options). Because of this, credit cards have higher interest rates than other types of revolving credit lines.
Financing options that bypass banks include community development finance institutions, venture capitalists, strategic partner financing and angel investors.
These are the steps for obtaining a line of credit:
Once you close on a line of credit, you should have access to funds within a few days. Some online lenders may take a few days to wire funds to your bank account, but some offer funds as quickly as the same day the loan documents are executed.
Liens help drive down a borrower’s interest rate. When property offsets a loan’s risk, the lender is likely to recoup its money, even if you default.
As with many small business financial management options, a revolving line of credit has upsides and downsides.
Pros of a revolving line of credit include the following:
Cons of a revolving line of credit include the following:
Despite these drawbacks, revolving lines of credit have many advantages that make them ideal for small business owners. Using revolving lines of credit, you can finance outsized expenses that will grow your company.
For large but necessary growth expenses such as payroll and office rent, a revolving line of credit can be an ideal choice.
Revolving credit lines are among the most flexible forms of small business funding; you can use them virtually however you please. For starters, you never have to use the entire credit line, and you pay interest only on the funds you actually use. On top of that, there are virtually no rules against using credit line funds for specific purchase categories. The only real limit is the size of the line. Many lines are too small for, say, a commercial real estate purchase. Otherwise, business credit lines work entirely for you, entirely on your terms.
Max Freedman contributed to this article.