Everything You Need to Know About Revolving Lines of Credit

I actually use revolving lines of credit to shore up my own finances in business as well as in my personal finances. I do my best not to carry balances and pay interest, but they can be helpful in smoothing cash flow, especially for someone with a variable income. This article from Kabbage breaks it down.

Running a business comes with many challenges. Customers don?t always pay on time, seasonal demand shifts can result in income and payment swings, and unforeseen expenses can cause short-term cash flow crunches. Small and large businesses alike experience these problems. Everyone needs access to credit to smooth operations. If you are in need of operational funding to keep your business running smoothly, it might be time to consider opening up a revolving line of credit. Revolving credit, which is also known as a ?revolving line of credit? is a fantastic capital access tool that can help you and your business pay expenses on time, meet payroll, or shore up lapses in cash flow.

Revolving Credit versus Business Loans

Revolving credit facilities differ from business loans in a few key ways. First, revolving credit is open-ended and more flexible. Instead of borrowing a set amount of money and managing disbursements internally over a long period of time, revolving credit offers access a specified amount of credit that can be used whenever you need it. Secondly, once revolving credit is repaid, the credit becomes available again (up to your maximum limit). Closed-ended credit products such as business and installment loans require fixed (rather than variable) payback schedules. Once a business loan is fully repaid, the facility closes.

One other key difference?in credit products is interest. A business loan requires a borrower to start paying interest on the full loan amount immediately, while interest on a revolving line of credit is only charged when a borrower uses the credit. In general, interest rates for revolving credit facilities are higher than business loans. However, if you plan to use credit sporadically and pay it back quickly, why rack up unnecessary expenses? With a revolving credit facility, you only pay interest on the money you actually borrow for the amount of time you borrowed it.?

How to Apply for Revolving Credit

When a business applies for a revolving line of credit, the lender will most likely ask about your credit history, company balance statement, cash flow statement, income statement, and (potentially) other metrics of business performance. Assessing these factors, the lender will decide whether to approve or deny the credit facility. If approved, the lender and borrower agree to repayment terms with the lender setting the designated upper limit amount of the credit line. While a revolving line of credit agreement remains open, the borrower can borrow as much as they want at any time (up to the maximum credit limit). In general, revolving line of credit facilities will not require a monthly payment. Rather, the lender will allow the borrower to pay back funds as they become available. The lender makes money by charging a pre-determined amount of interest for the length of time the money is borrowed. Similar to credit cards, revolving credit facilities may require a ?commitment fee? and/or minimum payment schedule, to be agreed upon upfront.

Secured versus Unsecured Revolving Credit

If a borrower is unable to repay a debt, the lender will want to make sure they can get their money back. Therefore, depending on credit underwriting results, lenders may require credit lines to be secured. Revolving credit can be issued as secured or unsecured. In a secured credit facility, a borrower will be required to offer collateral or a personal guarantee as a secondary source of credit repayment. Personal guarantees can be risky to the borrower because, if something goes awry in business, the borrower?s personal assets may be at stake. On the other hand, specifying business collateral to secure a credit?facility?will keep personal assets safe. For borrowers with poor credit history or poor cash flow management, secured revolving credit may be the only option.

Alternatively, unsecured credit revolvers require no collateral or personal guarantees. This is more favorable for the borrower, less favorable for the lender. As you might expect, secured revolving credit has lower interest rates and unsecured revolving credit requires higher interest rates to offset the higher risk of default.

Is a Revolving Line of Credit Right for You and Your Business?

If you have short-term recurring needs related to funding, revolving credit is probably right for you. If you have a long-term capital expense, you may want to explore other lending products that may offer lower interest rates. Regardless, one of the main benefits of a revolving line of credit is that you can qualify for a line of credit and access the credit when you need it. Revolving credit can act as a great safety mechanism, especially if you apply and qualify before you actually need the funding. With no need to pay interest on unused credit, qualifying for a revolving line of credit is an easy way to make sure your business continuity remains strong.

Online business lenders are making the revolving credit qualification process even easier. Online lenders are able to minimize the amount of required paperwork and offer an automatic approval process, which allows small businesses to qualify for larger credit lines. While banks may be reluctant to lend to small businesses because they lack enough credit or payment history, online lenders consider a wider range of qualifying data and are perfectly positioned to offer credit facilities to businesses with less-established credit histories.

If you want to build your own safety net or develop peace of mind, assess your company?s credit strategy and apply for revolving credit. A revolving credit facility may be the mechanism to help smooth your cash flow crunch, simplify your daily business operations, and keep your payroll running smoothly.

This is a partnered post, provided by Kabbage.

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