Applying for a revolving line of credit can be a great way to borrow money for your small business, especially if you experience cash flow shortages. Typically, these funds are used to afford fluctuations in operational expenses. In addition, due to the short-term and flexible nature of this type of financing, it can be a beneficial tool for your overall financial strategy. Still, it isn’t the right type of credit line for all businesses, which is why we’ll explore the pros and cons of this product. By the end of this blog post, you should understand how revolving credit works, and determine if it’s the right business financing option for your company.
What is Revolving Credit?A revolving line of credit is an open-ended business loan that gives you access to a specific amount of cash as needed up to the credit limit. Although they’re similar to credit cards and personal lines of credit, they differ because they’re secured by business assets. In addition, revolving credit agreements often have a lower interest rate than credit cards, and the funds can be transferred to your checking account without fees.
How Can Business Owners Use Revolving Lines of Credit?Revolving lines of credit are ideal for seasonal businesses or companies that experience sales fluctuations. If your business has a high and low sales seasons or has a gap between completed work and payment, you may find that a revolving line of credit helps create a bridge. For example, if your business receives a large order and you need to buy inventory in order to complete it, a revolving line of credit can be an ideal way to purchase that inventory. In the upcoming sections, we’ll dive into the pros and cons of a line of credit that has a revolving limit. By weighing the pros and cons, you can determine if this is the right funding option for your business.
The Pros of a Revolving Line of Credit
1. Funds Are Readily AvailableOne of the advantages of having a revolving line of credit is that the approved maximum amount of credit is available whenever needed. Therefore, you don’t need to go through a lengthy approval process to get a critical injection of cash. Instead, you’ll simply borrow from your existing line as needed. If you think that you’ll require additional business financing in the future, plan ahead and apply for a revolving line of credit. Even if you don’t need it immediately, you’ll have peace of mind knowing that you have access to these funds.
2. The Financing Can Be SecuredSome revolving lines of credit can be asset secured in order to help lower interest rates. Unlike credit cards, which aren’t secured, revolving lines of credit can be secured using collateral types, such as:
- Real estate
- Other valuable assets