What Are Revolving Lines of Credit and How Do They Work?

When people think of credit, most think of credit cards. This brings to mind both positive and negative ideas. Credit cards are flexible and easy to qualify for, but they can also carry pretty high-interest rates and penalties. Wouldn’t it be great if you could get the same flexibility and convenience, but with lower interest and better terms? That’s exactly what lines of credit offer to business owners.

What Are the Advantages of Lines of Credit Compared to Other Lending Options?

We’ve already talked about the benefits of a line of credit next to credit cards. What about term loans? The truth is that both can be great tools for your business, but they cover very different needs.

A line of credit is always going to be faster and more flexible than a term loan. You can qualify more quickly, and once you’re approved, you can draw on the funds as working capital. You decide how to spend the money: advertising, inventory, payroll, emergency needs and other expenses.

Conventional loans, on the other hand, have even better interest rates. They give you a larger amount of financing, and usually terms of 15–25 years. That makes long-term loans a better choice for large purchases such as heavy equipment or real estate, and lines of credit better when you need short-term financing right now.

Why Revolving?

When a line of credit is set up on a revolving basis, you have even more flexibility. It’s like being able to manage your credit. You don’t have to call the bank to request permission before upgrading your point-of-sale terminal or buying office equipment. You don’t have to deliver progress reports or spreadsheets to investors.

Revolving credit lines are open-ended funding tools. They have a maximum amount you can withdraw at any given time. That cap is there whether you make one large purchase or many smaller ones.

The incredible thing is that as you repay the credit amount, it becomes available for you to use again. This essentially gives you an endless amount of working capital to balance out your cash flow, as long as you make sure to pay back the funds every month.

How Do You Begin?

The requirements for getting a business line of credit are similar to a loan. You can either use collateral to back it up, called secured credit, or rely on a solid credit rating to help you qualify. These options are within reach of many small businesses.