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Pros and Cons of a Non-Revolving Line of Credit
June 04, 2018
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Pros and Cons of a Non-Revolving Line of Credit

June 04, 2018
Whether you know it or not, you’re probably quite familiar with a revolving line of credit. That’s because a revolving line of credit works essentially the same as a credit card does. However, what’s less commonly known is what’s called a non-revolving line of credit.

The main difference between a revolving and non-revolving line of credit is that once you use up your non-revolving credit, it’s gone. The only way to get more financing would be to apply for another non-revolving line of credit. This form of borrowing can be a good choice for borrowers who want to solve short-term cash flow issues, but it’s not without its downsides.

In this post, we’ll provide a full breakdown of the pros and cons of a non-revolving line of credit, so that you can determine if this is the right type of financing for your business.

Pros of a Non-Revolving Line of Credit

Flexible Payments

A non-revolving line of credit differs from a traditional loan in that if you don’t exceed the credit limit, there are no restrictions on what you can buy and when you can buy it. This makes a non-revolving line of credit ideal if you only need it to cover occasional, short-term cash shortages.

Relatively Simple Approval Process

Compared to many other types of financing, the application and approval process for a non-revolving line of credit is relatively seamless. According to Bankrate, some banks will give customers a decision in as little as 15 minutes and fund the account within one business day of your application.

Of course, this will only be the case if you have good credit and a verifiable earnings history.

Ideal for Small to Medium-Sized Purchases

While the credit limit on your non-revolving line of credit prevents you from making large purchases, it’s still well-suited for small to medium-sized purchases.

This is especially true if you’re making a one-time purchase. That’s because, since a non-revolving line of credit doesn’t replenish itself after you make payments, you can be finished with it once you’ve used it for what you need.

Cons of a Non-Revolving Line of Credit

Higher Interest Rates than Traditional Loans

Unfortunately, you’ll likely always have to make some tradeoffs when it comes to financing your business, and the non-revolving line of credit is no exception. For the flexibility of a line of credit, the tradeoff is that this method of financing will usually carry a higher interest rate than a traditional loan. That said, the balance on which you’re paying interest will likely be lower on a non-revolving line of credit, so your total interest expense may be lower even if the rate is higher.

Not Suitable for Large Purchases

Usually, if you’re looking to make a large purchase, such as buying real estate, a line of credit will be inferior to a traditional loan like a mortgage. That’s partly because, with a non-revolving line of credit, part of the way a lender confines their risk is with the credit limit.

If a purchase is so large that it requires the lender to grant you a very high limit, they’ll be taking additional risk. As a result, you’ll have to compensate them for that risk with higher interest payments or fees.

Adds to Your Debt Load

You should never take the choice to take on additional debt lightly. If you don’t pay down the balance of your non-revolving line of credit, you’ll accrue interest and that can get expensive. Therefore, when you apply for other forms of finance, those lenders will take a close look at how much debt you have.

That said, the fact that this type of line of credit doesn’t replenish itself after you’ve paid it down does help partially limit how fast and how much debt you accumulate.

Conclusion

The latest census figures put the number of small businesses at 27.9 million, and for every business, there’s an owner like you who must decide how to finance their company.

That decision can be difficult, but by educating yourself on potential financing options, it doesn’t have to be. With a firm grasp on your future plans and current financial status, plus a detailed understanding of your options, the right answer to your financing decision will readily present itself.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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