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When most people think of borrowing capital, loans are what come to mind. But there's a more flexible option available that’s gaining popularity–a revolving line of credit. In 2024, 40% of businesses looking for funding applied for a business line of credit. So, what is a revolving line of credit, and how does it differ from a traditional loan?
Unlike a traditional loan, a revolving line of credit gives you continuous access to borrowing funds. You can think of it a bit like a credit card, but with more capital and better interest rates.
In this article, we’ll explore how revolving credit works, what the pros and cons of a credit line are, and discuss what to consider when deciding if a loan or line of credit is best for your financial needs.
What is revolving credit?
Revolving credit is a type of credit account where the lender sets a maximum credit limit, and then funds can be borrowed, repaid, and borrowed again up to this maximum. This process gives business owners access to credit as they need it without requiring them to apply for new financing each time they need to make a large purchase.
How does revolving credit work?
You can use a revolving credit account to purchase assets and cover expenses as needed. Simply spend funds up to the set credit limit of your revolving credit account and pay the balance off over time. The amount you pay off becomes available once again, which you can immediately utilize.
Interest is only charged on the portion of credit being used, and whatever remains of your credit line can be used at any time.
Revolving credit examples
Let’s imagine for a second that you own a brewery. Business is doing well, and you need to expand operations so that you can meet demand. This requires spending capital on:
- 20-barrel fermentation tank - $40,000
- Storage tank - $15,000
- New canning line - $20,000
Now, let’s take a look at financing these purchases with some revolving credit examples.
With a $100,000 business line of credit, you could cover all these costs and still have $25,000 in credit left over. You’ll only be charged interest on the $75,000 in credit you used, and you may have the option to make interest-only payments for the first few years.
Alternatively, you could use a business credit card with a $100,000 limit to cover these purchases. Just like a line of credit, you’ll only be charged interest on your purchases, however, the interest rate and minimum payment will likely be higher. The upside is that your purchases may earn you rewards (e.g., cashback).
Types of revolving credit
There are two main types of revolving credit accounts: credit cards and lines of credit. A credit card allows you to make purchases and pay a minimum payment each month. You can spend up to your credit limit, but interest rates are often high compared to traditional bank loans.
A revolving line of credit is similar, except that you initiate draws instead of making purchases. Many businesses benefit from unsecured lines of credit, which don't require pledging specific assets as collateral. For instance, an unsecured business line of credit offers flexibility for managing cash flow fluctuations without risking business assets, though it may have slightly higher interest rates than secured options due to the increased lender risk.
Pros and cons of a revolving line of credit
Revolving lines of credit can be a great resource for seasonal retailers, service contractors, and manufacturing firms with cyclical production schedules, but they aren't a one-size-fits-all solution. Your assets, cash flow, and business needs are all factors that you should consider when evaluating an LOC.
Let’s explore the pros and cons of a revolving business line of credit to help you determine if opening an LOC is the right move.
| Pros | Cons |
|---|---|
| Draw funds as needed | Difficult to qualify for |
| Only pay interest on what you draw | Higher interest rates than other types of financing |
| Draw the same funds again after you’ve repaid them | Lower funding amounts |
| Flexibility to use funds on any expenses | Potential for fees and contingencies |
| Opportunity to build business credit |
Installment loans vs. revolving credit
Revolving credit is different from traditional installment loans in the following ways:
- Flexibility in usage: Use funds from an operating line of credit when and how you need them.
- Interest payments: Interest on a revolving line of credit is only charged on the funds drawn, not on the entire credit limit. In contrast, interest is charged on the full balance of a large business loan.
- Repayment schedule: Repayment terms on a term loan are preset. When paying a line of credit, there is more flexibility, with each draw having its own terms and the option to make more than the minimum payments.
- Access to funds: A revolving line of credit offers quick access to funds once set up, providing businesses with a readily available source of capital for immediate or unexpected needs.
While different, both term loans and revolving credit can be useful financing options for businesses.
Choose National Business Capital for revolving lines of credit
Whether you need capital to purchase new equipment, expand your operations, or cover unexpected costs, a revolving line of credit can help provide the funding your business needs.
With a streamlined approval process, securing a business line of credit from National Business Capital isn't complicated. Start your business line of credit application today and get the funding you need with the help of our expert business advisors.
ABOUT THE AUTHOR
Joseph Camberato is the CEO & Founder of National Business Capital, where he has led the company in funding more than $2.5 billion for growth-minded businesses since 2007. With firsthand experience building NBC from a startup into a national private lender, Joe writes on the economic forces shaping access to capital, including interest rate shifts, private credit trends, and the challenges mid-sized companies face when banks pull back.
