Revolving lines of credit and lines of credit are two types of financial arrangements that provide business and personal borrowers with flexibility. Despite their similar names, the two have significant differences. While both offer more flexibility than traditional loans, the decision between choosing revolving versus non-revolving lines of credit isn’t always clear cut. In this article we’ve broken down the differences between the two so you can make the most informed decision as a business owner.
What is a revolving line of credit?
Revolving lines of credit involve a lender assigning the borrower (in this case, you the business owner) a specific credit limit based on factors like credit score and your individual credit history for first time applicants. Business credit cards are the most common example of revolving lines of credit. When a payment is made on a revolving credit account, those funds become available to borrow again. There is no set monthly payment for revolving lines of credit, although interest accrues over time. However, you only pay interest on the portion of the amount that you borrowed, and paying off your full balance can help you save on interest costs. Regular, consistent payments can influence a lender to increase the maximum credit limit as well. On the other hand, consistent late payments could lead to a credit limit decrease.
Revolving lines of credit are also popular with small business owners to safeguard against potential cash flow problems or unplanned expenses.
What is a line of credit?
In practice, a line of credit works more or less the same as a revolving line of credit. The credit allotted can be used to make purchases and pay bills, and you can spread out spending the maximum credit limit over time. The entire loan amount does not need to be used. The main difference between non-revolving and revolving lines of credit is that the account of a non-revolving line of credit is closed once all the available funds are used. To get more credit, your business will need to apply for a whole new credit line.
Secured vs unsecured lines of credit
Along with revolving versus non-revolving considerations, you’ll also need to decide if you’re going to choose a secured or unsecured line of credit. Both have their benefits and drawbacks, and there’s no one right answer for every business. By comparing and contrasting both, you can confidently choose the one that makes the most sense for your individual business circumstances.
Secured lines of credit
A secured line of credit uses your business assets, commercial property, or your personal property as collateral. In the event that you default on payments, the lender has full right to repossess the collateral securing the loan. A secured line of credit can offer higher credit limits and lower interest rates over unsecured lines of credit, but you’ll need to ensure you can keep up on payments to keep your property from being repossessed.
Unsecured lines of credit
An unsecured line of credit works exactly the same as a secured one, except you are not required to put forth collateral in order to qualify. If you have limited assets or are particularly risk averse, an unsecured line of credit may be an attractive choice. In the event that you default on payments, your property will not be repossessed as it would with a secured line of credit. However, because unsecured lines of credit are a significant risk to lenders, they often come with lower credit limits and higher interest rates than secured ones.
What to consider when applying for a business line of credit
Where revolving or non-revolving, you should research the terms and read the fine print of every lender’s offer before signing on the dotted line. Make sure you’re familiar with factors such as:
- Credit limit: Is the limit high enough for your business needs?
- Interest rate: Is the interest rate reasonable and competitive with what other lenders are offering?
- Requirements to be approved: If you’re a first-time applicant, you may have to meet additional requirements to be approved, versus someone who has had a business line of credit previously.
Additionally, when comparing lenders, consider whether your needs would be best met at a larger bank or at a smaller, independent community bank. In many cases, lending decisions at larger banks are made through stringent algorithms decided by computers. With little flexibility, you may find your request for a business line of credit denied.
However, at Bank 34, we believe that financing your business shouldn’t require you to jump through hoops or be at the mercy of pre-programmed decisions. We take the time to get to know you, your business, and your financial situation in order to make holistic lending decisions. In general, you’ll enjoy a faster, more efficient loan process at independent banks like us. Our Commercial Lending Team is highly responsive and experienced, and will work tirelessly to help make your business vision a reality!
Bank 34: Business lending made easy
At Bank 34, we’re dedicated to helping your business succeed. Our personal attention and efficient service can help you stand independent as a business owner. Along with revolving lines of credit, we offer a variety of commercial lending products that include:
- Small Business Administration (SBA) loans
- USDA loans
- Small business financing
- Long term financing for business acquisitions
- Working capital, equipment and manufacturing loans
- Commercial real estate
- And more
Along with funding your business, we can also help with day-to-day operations by helping you take care of your business account, merchant capture, and e-banking needs. With Bank 34 as your partner, you can focus on running your business without spending too much time worrying about the financial side. Whether you’re early in your entrepreneurship journey or a seasoned veteran, contact us to see what we can do for your business banking needs.
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