Running a business comes with its fair share of expenses. From covering monthly costs like office space and employee payroll to managing daily expenses, having a stable cash flow is crucial for keeping things running smoothly. However, cash flow challenges are inevitable for businesses of all sizes. Even if your revenue remains high, there may come a time when you have limited access to cash. In such situations, having a revolving line of credit can be a lifesaver.
What is a revolving line of credit?
A revolving line of credit is a pre-approved pool of funds that you can borrow from whenever the need arises. Unlike traditional term loans, a revolving line of credit does not come with a set repayment plan. You only pay interest on the amount you borrow, and once you repay the funds, your credit available goes back to the original amount. This flexibility allows you to borrow and repay funds based on your business’s needs.
Some of the key benefits of having a revolving line of credit include:
- Flexible repayment terms: You can pay the minimum amount due in slow months, but keep in mind that the borrowed amount continues to accrue interest until fully repaid.
- Flexible usage: Unlike other types of business funding, a revolving line of credit allows you to use the funds for any business expense.
- Build business credit: Responsible borrowing and repayment can help you establish a positive credit history, making it easier to qualify for other loans in the future.
- Quick access to cash: It serves as a backup plan for unexpected expenses or opportunities, providing the liquidity needed to keep your business operations running smoothly.
The difference between a revolving credit and credit cards
While both a revolving line of credit and a business credit card offer access to funds, they have key differences. With a revolving line of credit, you do not need an actual card to access funds, and there is no specific purchase requirement to utilize the funds. This flexibility makes it a versatile option for businesses looking for quick and easy access to cash.
What to know about applying for a revolving line of credit
When applying for a revolving line of credit, it’s essential to understand that not all credit lines function the same way. Banks may offer more financially sound options, but alternative lending sources can also provide options for businesses with varying credit backgrounds. While banks may have stricter approval criteria, alternative lenders offer more accessible options for businesses that may not qualify for traditional bank loans.
It’s important to note that some revolving lines of credit may require collateral or guarantees against the borrowed amount. Qualification standards for unsecured credit lines may be stricter, similar to traditional bank loans. Your credit score, business experience, and revenue are key factors that lenders consider when evaluating your application.
Should you apply for a revolving line of credit?
In conclusion, a revolving line of credit can be a valuable tool for businesses with inconsistent cash flow. While it may come with higher interest rates and potential collateral requirements, it offers flexibility and quick access to funds when needed. If you are confident in your ability to manage borrowing responsibly, a revolving line of credit can help set your business up for success.
