As a small business owner, there will be a time where you need to access capital to keep your business moving forward. Most entrepreneurs rely on personal credit cards, but revolving credit is a great tool that small business owners can use to get the financing they need. Read on to learn what a revolving credit is and how it works.
What Is Revolving Credit?
You can think of a revolving credit like a credit card. You can borrow up to your credit limit and pay back what you borrowed over time. Once you begin to pay off the loan, you can borrow from the line over and over again. If you do not pay it off in full, you either carry the balance or revolve it over to the next month and pay interest on the remaining balance left if any.
Traditional business loans differ because the business owners are given funding upfront and they pay it back over time. If they would like to access funding again in the future, they need to reapply for a new loan.
Types of Revolving Credit
There are three types of revolving credit accounts that you might be familiar with. They are credit cards, personal lines of credit, business lines of credit, and home equity lines of credit (HELOC). Revolving credit is best when you want the flexibility to spend on credit over and over without a specific purpose.
- Credit cards – with a credit card you have a set credit limit which you can use as much or as little as you want. The balance resolves to the following month and the account is open when there is no balance left.
- Business lines of credit – you can get a line of credit to help with your cash flow to help you cover any unexpected expenses or fluctuations in the business.
- Home equity lines of credit (HELOCs) – HELOCs charge lower rates than credit card accounts because they are secured by real estate.
- Personal lines of credit – this is when you take out an unsecured revolving bank loan which is useful for those who have uneven income or expenses.
Pros of Revolving Credit for Business
There are a few advantages to getting revolving credit, the main one being that you do not have to keep applying for loans or additional lines of credit. The other benefits include:
- The ability to separate personal and business lines of credit
- Building business credit
- Flexible payment terms
- Cash on demand
- Ability to use the line of credit when needed
Cons of Revolving Credit for Business
There are a few disadvantages associated with a revolving line of credit.
- They have higher interest rates than traditional loans
- There are commitment fees
- They have lower credit limits
When Should You Get Revolving Credit?
There are several options of what you can do with a revolving line of credit to help your business expand. The following examples are good options:
- You need to hire new employees
- You need to stock up on inventory
- Your business operates seasonally
How Do Revolving Credit Affect Credit Scores?
Having a revolving credit account can either help or hurt your credit score depending on how you use them. If you have no credit history, you can get a credit card to help boost your credit score. The biggest factor that determines what kind of credit score you have is making sure you pay on time. Setting up autopay is a great way to never miss a payment or deadline.
Credit bureaus will look at your payment history when calculating your credit score. So, if you miss payments, it can have a dramatic impact on your score so be sure to make them on time, so you have a strong credit score.
Another factor that is used to determine your FICO score is the amounts owed which accounts for 30% of your score. Make sure that you keep your credit utilization low because this will also help boost your credit score.
Tips for Using Revolving Credit
Here are a few tips for using revolving credit for your small business.
- Manage your cash flow – only borrow what you need and repay it once you have the income you need.
- Plan ahead if you need a series of loans – start paying off the loan right away so you can get approved for a larger credit limit if needed.
- Control your spending – be sure to monitor your spending and plan to pay off what you borrow in full and on time.
- Pay more than the minimum – if you pay the minimum it will take you a long time to pay off the account and will pay more interest. Try paying more than the minimum if possible so you can save money in the long term.
Before you open a revolving credit account, be sure to familiarize yourself with it so you know what you and your business are getting into. Hopefully this helped you consider the pros and cons so you know if a revolving credit is right for your business.