Lines of credit allow businesses to borrow money for expansion projects, pay for expenses like bills, and fill inventory orders, are some examples. In this post, we will talk about the two types of lines of credit which are revolving and non-revolving. Both options serve different needs and have their own interest rates, limits, terms, and application requirements. After reading this post, you will be able to determine which one is right for your business.
What is a Revolving Line of Credit?
A revolving line of credit is like a credit card. You can spend up to the credit limit once it is opened. If credit is available, you can continue making purchases, and if you do not use the line, it does not expire or close.
A draw is each of a revolving credit account. The amount of the draw that is deposited into your checking account can be used as you like. Funds are available quickly once a draw is initiated and you can make a draw and have the funds in your account within minutes. Each draw subtracts from available credit, limiting the amount that can be drawn until outstanding draw are paid back.
This type of financing offers a lot of flexibility and are beneficial if you need to fulfill cash flow shortages or make small purchases over a period.
It is important to note that Interest rates on revolving lines are higher than non-revolving lines of credit, but not as much as credit card interest rates. This can make a revolving account a more efficient use of funds over using credit cards, especially if the balance is not paid in full.
Most revolving lines of credit structure charge interest rates based on the prime rate plus an amount determined by the lender. As the prime rate goes up, your interest rate increases by a similar amount. As the prime rate decreases, so will your interest rate.
In addition, the credit limit on a revolving line of credit will be smaller than a non-revolving line. Depending on your needs, this can mean limited access to capital.
What is a Non-Revolving Line of Credit?
A non-revolving line of credit is a lump sum that is paid all at once. A business loan is a type of non-revolving line of credit. They have lower monthly payments than non-revolving lines of credit. Interest rates are fixed and lower, so they do not fluctuate on a monthly or yearly basis.
Once the non-revolving line has been paid off, the account is closed. If you want to open another non-revolving line of credit, you need to apply again.
This means there will be additional inquires on your credit report, which will impact your credit score. It is worth nothing that this can affect your credit history.
If you need financing fast, a non-revolving line of credit is not for you. Since there is an application process involved with each new non-revolving credit line, you won’t have quick access to funds. Non-revolving lines of credit are made in a lump sum, making them beneficial for businesses who need to make large purchases, or are investing in something like an expansion project.
The Bottom Line
The best option for you will depend on your needs. Funding small transactions frequently are great for a revolving line because it does not require an application process each time you need access to new funds.
A non-revolving line is the best choice for large capital purchases. It has lower monthly payments, and a fixed, lower interest rate.