How does a revolving line of credit work?
Many small business owners searching for viable funding options will investigate the pros and cons of revolving credit. A revolving line of credit is quickly becoming the go-to credit solution due to its flexibility, convenience, and reduced interest – you are only charged interest on the amount that you draw. The question is, what is a revolving line of credit? How does it work? And is it the right fit for your enterprise? Find out all of this and more below.
What is a revolving line of credit?
A revolving line of credit operates similarly to a credit card. Businesses enjoy access to a pool of funding that can be used as and when needed throughout the month. Come month-end, the business owner only pays interest on the amount drawn. Once the borrowed funds and the interest incurred are paid back in full, the credit balance is restored to its original amount – hence the reason why it is a ‘revolving’ line of credit.
Business owners benefit from a steady, consistent, and reliable cash flow to ensure all expenses are adequately covered and gain access to various business growth opportunities. Another benefit is that, as long as you pay back what you owe within the agreed-upon timeframe, you do not have to reapply for new credit from month to month.
Is it the right fit for your business?
If you are looking for fast, cost-effective credit solutions for your enterprise, there are very few reasons why a revolving line of credit will not meet all of your expectations. The only downside to this type of credit is that some lenders charge an inactivity fee if you do not draw any cash for a certain period of time. Therefore, if you intend to access a revolving line of credit purely to cover costs associated with emergencies, you may be better off applying for a credit card tailored for commercial use.
A revolving line of credit is much better suited to embracing opportunities for business growth, purchasing large assets, and coping with cash flow issues brought about by seasonality challenges or slow-paying clients. If the latter is a problem within your organization, be sure to look into invoice factoring, too!