What Is a Revolving Business Line of Credit & How Does It Work?
Suppose you’re a business owner who could use cash on hand but doesn’t have it readily available. This is when a revolving line of credit would come in handy. Let’s make clear what these terms mean.
A line of credit is a determined amount of funds available from a financial institution to a borrower. Once the borrower pays back any borrowed money, the line of credit ends. For businesses who repeatedly want to tap this resource, a revolving line of credit works better, though. A revolving line of credit continually replenishes the amount available to borrow once a borrower pays back any amount owed.
A credit card is a prime example of revolving credit. Each month, the cardholder borrows based on a limit. If a cardholder has a credit limit of $10,000, charges $1,000 on the credit card, the holder has $9,000 left to borrow. But when the holder pays back the $1,000, the line of credit replenishes to $10,000. Revolving credit is unlike a traditional small business loan, which is a line of credit but doesn’t replenish or revolve once the borrower repays any amount borrowed. For businesses, revolving lines of credit work similarly. The lending institution provides an amount available to a business. Once the business repays any amount borrowed plus applicable fees and interest, the lending institution will revolve the amount to its original figure.
The main benefit of revolving lines of credit is that they are readily accessible to businesses. A business owner doesn’t have to prepare necessary forms, apply, and wait for approval from a financial institution like a loan. With cash available in a business bank account, a business owner doesn’t have to delay making vital repairs or taking advantage of expansion.
If you’re a business owner, and want to acquire a revolving line of credit, you will have either a secured or unsecured loan.
- A secured line of credit means that the borrower will have to use one of your assets as collateral in case you don’t pay back the loan. For example, in a car loan, the collateral is the car purchased with borrowed funds. Not paying the loan results in the lender taking possession of the vehicle.
- An unsecured loan comes without any collateral requirements, but this is typically available at lower limits and for consumers with good credit.
The three most common types of revolving lines of credit to small business owners are:
- Short-term: These are for shorter terms and less credit but can be easier for those with poor credit.
- Long-term: These can last years and include higher credit amounts but have stricter qualifications.
- Business Credit Card: These provide flexibility and convenience. Best for small day-day business purchases.
Lending institutions determine who has good credit through a credit score.
What Type of Credit Score Is Required?
This is a number between 300-850 and is determined by credit history. The higher the score, the better. Factors in credit score include amount of debt, types of loans, and most important, repayment of debt. Those with higher credit scores receive lower interest rates and have more lending options available. Sometimes though, businesses can make mistakes that result in low credit scores. This isn’t a death sentence, and there are lending options for business lines of credit for those with low credit scores.
Four Ways A Revolving Line of Credit Can Help Your Cash Flow
Once obtained, a revolving line of credit can be used for many of the most pressing business needs. It is especially beneficial to businesses whose sales fluctuate like retailers during the holiday season or construction companies. Here are four ways you can use your credit to help your cash flow.
- Payroll: Without employees, those vital needs like stocking, ordering, and customer service can’t be done, and the costs to businesses to continually hire and train staff can be very expensive.
- Purchasing necessary equipment: Let’s say you run a restaurant, and the central air dies. It needs to be fixed immediately in order to stay open for business. Or, there’s a new cash register that’s much more efficient at taking orders that your competitors are using right now. Getting this immediately levels the playing field.
- Expansion: Lean times are often the best time to expand, if greener pastures are on the horizon. In June, the Fed announced it expects the Gross Domestic Product to contact 6.5% in 2020 but expect it to grow by 5% in 2021 and 3.5% in 2022. Having cash on hand will expedite business expansion.
- Increase inventory: Businesses that do the bulk of their business at certain holidays or seasonally will need to increase inventory significantly at specific times. A restaurant on Cape Cod might be open year-round but will see a significant increase in summer. That restaurant must purchase extra food to meet demand.
Let’s say you the business owner see revolving credit as beneficial but are unsure how to get it and how much is available.
How do You Qualify and How Much Can You Get?
Qualification is determined by multiple factors, including length of time in business, sales, and amount of debt. Generally, a business has to operate for at least three months and have revenue of $15,000.
Another question to consider, how much can I get? How much is determined by many factors. We provide lines of credit from $10,000-$5 million.
Before Making a Final Decision
Keep in mind that some revolving lines of credit require minimum withdrawals and include fees. Typically, revolving lines of credit have lower lending amounts than traditional business loans. You can talk to a Financial advisor today and get options within seconds.
An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.