A business revolving line of credit is a set maximum amount of funding, offered by a lender, that a business can access regularly or in a lump sum. It works just like a credit card for businesses.
If a business, for example, has a revolving line of credit set at $20,000, it can borrow any amount it needs under this limit; $2,500 or $17,000 or even the whole $20,000 without the need to provide extra documentation. The business will pay off some of this amount.
No Fixed Repayments
There are no fixed repayments for a business revolving line of credit. If a business borrows $300 of the amount, this can be repaid in irregular installments over 2 or 3 months. The main idea is to make regular repayments and not to go too long without making these payments.
There are several advantages that revolving line of credit offers to a business:
• Separating personal and business finances
In a small business, the business owner is often forced to step in with personal finances to ease a cash crunch. With access to a revolving credit line, the business is able to maintain its finances.
• Building favorable credit history
A new business can build its credit score relatively quickly by using revolving credit lines. This is because these regular repayments are reflected in the credit history repeatedly over a short time.
• Flexible repayments
New businesses often face the challenge of swinging business between low and high seasons. A term loan with fixed repayments is not the best facility when cash inflows are irregular. But a revolving credit line offers flexibility, allowing high repayments when business is good, and lower repayments in low season.
• Cash on demand
Unlike term loans and other longer-term funding facilities, a revolving credit line is a cash that is available on demand. All that is required is an application and the funds are released immediately without further documentation or paperwork. The lender already has the business’ details.
• Versatility of use
A revolving line of credit is flexible to use wherever the business owner feels there is a need to inject cash. This could be purchasing more inventory or hiring a temporary worker. It has the flexibility of a credit card, suitable for use for multiple expenses.