Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

There often comes a time when small business owners need access to capital they don’t readily have. Profit margins are often tight in the world of small business, and when unforeseen costs or opportunities arise, you need capital. While small business loans are great financing options when you’re looking to grow or expand, the slow underwriting process and strict eligibility requirements aren’t always the right solution.

Many small businesses opt for a revolving line of credit to have fast access to cash whenever they need. A business line of credit can be a useful funding option for all types of businesses.

In this article:

• Learn what a revolving line of credit is and how it works.
• Explore how revolving credit can support your small business in a variety of ways.
• Discover how to apply for a revolving line of credit for small businesses.

What is a revolving line of credit?

If you’ve ever used a credit card, you’ve experienced the basic concept of a revolving line of credit. “Revolving credit” means that as long as you pay back the credit you use within the repayment terms, you’ll have access to your maximum credit limit.

Types of revolving credit accounts include personal lines of credit like home equity lines of credit (HELOCs) or installment loans, as well as business lines of credit.

A revolving line of credit for small business combines this concept with the basics of a term loan. Like a loan, you’ll apply for a certain amount of money, and when a lender approves, you’ll have access to that cash — sometimes the same day you apply. Rather than pay interest on the entire loan amount, you only pay interest on what you use. Provided you pay that amount back within the repayment schedule, plus interest, you’ll have access to the full loan amount again.

The loan amount “revolves” because you use it, pay it back, and can then use the full amount again. With a traditional loan, you just get a one-time, lump sum payment that you typically repay with fixed monthly payments.

How does a business line of credit work?

A business line of credit is a cash equivalent. Unlike a business credit card, a line of credit doesn’t always have an accompanying card. (Although some do.) Rather, you usually debit from the business revolving line of credit into your business bank account, similar to how a loan works.

Once the money is in your account, you can use it to pay for all kinds of business needs. Whether it’s overhead, operations costs, other debts, or something else, a business line of credit works like cash. That’s what makes it such a flexible and useful option for businesses needing liquidity and cash flow.

Again, once you’ve paid back a withdrawal, plus interest, the revolving line of credit resets so you’ll have access to the full loan amount again.

How can you use a revolving line of credit?

Since it works like cash, you can use a revolving line of credit for virtually any business need. Some common industry uses include:

• Increase cash flow: A revolving line of credit is especially useful for invoice- or contract-based businesses to gain working capital while awaiting payments from customers.
• Emergency expenses: While it’s smart to build your own rainy day fund, a revolving line of credit for small business gives you a fallback plan if equipment breaks down, the price of raw materials spikes, or you face any other emergency or unforeseen expense.
• Seasonality: Restaurants, hospitality businesses, and other tourist-based businesses in resort areas use lines of credit to stay operational through the offseason.
• Business opportunities: While small business owners often prefer the larger loan amounts of term loans to expand, you can still use a line of credit for commercial real estate, marketing campaigns, inventory acquisition and other growth-minded activities.

Since revolving credit allows you to draw, repay, then draw again, they’re particularly useful for companies that need capital to complete projects now, without taking on fixed monthly payments. Construction companies, engineering firms, marketing agencies, and healthcare businesses are just some of the business types that can benefit.

How to get a revolving line of credit

One of the major advantages of a business line of credit over some other financing types is that they’re much easier to get. Both traditional lenders and online lenders offer revolving lines of credit with eligibility requirements that are much lower than term loans.

Generally, you can qualify with less time in business, lower annual revenues, and a lower personal FICO credit score than term loans. Many lenders also don’t require a business credit score. These lower requirements make lines of credit more appealing for startups and business owners with bad credit. Your credit history and credit report will impact your loan terms, but it may not preclude you from getting financing.

Line of credit application process

To apply for a revolving line of credit, it’s pretty simple. Follow this step-by-step process:

1. Determine how much funding you need: Revolving credit tends to come with higher interest rates than term loans, so it’s important not to take more than you need. Identify how you’ll use a line of credit and only request a responsible loan amount so that minimum payments don’t become a burden.
2. Check your credit score: Although credit score requirements are much lower with lines of credit, they’ll still impact interest rates and who is willing to lend to you. Knowing your credit score ahead of time will help you rule out certain providers. Good credit will make you eligible for a larger amount of credit and lower interest rates.
3. Shop and compare: There are hundreds of banks, credit unions, and online lenders offering revolving lines of credit for small businesses. Most offer a prequalification process so you can see your likely interest rates and loan terms without a hard credit check.
4. Apply: It’s usually easy to apply for a revolving line of credit online. Some loan application processes take just a few minutes and you may be able to have funding available in as little as one business day.

Conclusion

A revolving line of credit offers small business owners fast, flexible access to cash. Businesses in any industry can benefit from using one, as it helps fund slow periods, financial emergencies, business opportunities, and much more. Getting a business revolving line of credit is easier than many other types of financing, making it a compelling option for established businesses and new businesses alike.

FAQs

What is a revolving line of credit?

A revolving line of credit is a loan that gives you access to a maximum amount of money. If you draw from that line of money, you’ll only have access to the remaining available credit. However, if you pay it back, you’ll have access to full loan amount. As such, it’s revolving because you have access to the full amount as long you pay it back.

A non-revolving line of credit, on the other hand, is a type of loan that does not give you access to additional credit after you’ve paid back what you used.

What is a business line of credit?

Revolving lines of credit often take the form of business lines of credit. This financing solution allows a business to draw from a credit line to make business purchases. Rather than pay interest on the full credit line, they only pay interest on the money they withdraw. As such, it’s something of a cross between a term loan and a business credit card.

How can you use a revolving line of credit?

A line of credit is a cash equivalent, meaning you can use it like cash. You can use it to make everyday purchases, pay overhead, invest in marketing campaigns, consolidate other debt, or practically any other business purpose.

What are the advantages of a revolving line of credit?

Some of the primary advantages of a line of credit over other financing types include:

• Fast funding
• Interest payments only on what you use
• Lower eligibility requirements

What kind of businesses can use a revolving line of credit?

Since they’re so flexible and you don’t pay interest on them until you use them, lines of credit are great lifelines

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