Borrowing money is often one of the largest obstacles small business owners face. Whether it’s managing the payroll, buying more inventory or paying the bills while waiting for a slow-paying customer, some owners often don’t know where to turn to get funding during these critical times.
This is where a small business revolving line of credit can help.
A revolving line of credit is a very important tool that’s able to keep your business operations rolling with the ups and downs like the scenarios mentioned prior. This line of credit can also help your business pursue opportunities quicker and invest in your growth, even if you don’t have any cash on hand.
Before you consider this line of credit, however, it’s best to know how this tool will work, what it can be used for and how it can fit your business needs.
What is a Revolving Line of Credit?
Basically, a revolving line of credit is a flexible method that allows you to borrow money when your business needs it most. Unlike borrowing a fixed amount of money all at once, similar to a loan, a revolving line of credit allows you to dip into your pre-approved limit and take out only what you need.
For instance, if your business were approved for a $30,000 line of credit, this would mean your business would be able to borrow $30,000 at most. But, unlike a loan, you don’t have to borrow it all at once, making it extremely flexible. Whether you need $2,000 or $5,000, you simply take the money you need, and you will only pay interest on the amount you’re borrowing.
With this line of credit, you will pay back any money you have borrowed, and there will be no fixed monthly payment. For example, if you were to borrow $5,000 from your line of credit, you can either pay it all back at once the following month, or if you choose to do so, you can pay $300 per month for the next few months with interest. As long as you’re making your minimum payments, similar to a credit card, you won’t have to worry about paying any late fees or taking on too much debt for your business to handle.
How Is It Different From a Credit Card?
For starters, you don’t have to carry around a plastic card everywhere you go to make a purchase. Another difference is that you can borrow money for any reason since it’s no different than withdrawing cash from a bank account. For instance, if you were short a few hundred dollars for payroll, you wouldn’t be able to pay your employees with a credit card, but your line of credit, since it acts like cash, would be able to do so.
In a way, a revolving line of credit works a lot like the cash advance option from a credit card, but you won’t have to pay the exorbitant fees and higher interest rates that come along with it. And this is the biggest advantage. Since a revolving line of credit offers lower fees than that of a credit card, it allows you to treat it like cash and helps you save a lot of money as you grow your business.
How Is It Different From a Business Installment Loan?
A revolving line of credit is often referred to an open-ended credit line because you have to be approved for how much money you can borrow in advance without having to re-apply every time. Compared to a traditional business loan, where you would have to go to the bank, talk to a manager and wait for an answer, a revolving line of credit can be much more flexible, offering you a quick response and cash when you need it more.
Another major difference, when compared to an installment loan, is that a revolving line of credit is often used for smaller loans to help manage the ups and downs of a business such as managing inventory or paying a small bill. Since the traditional business loan is often considered a long-term proposition with a fixed monthly rate, they are typically used for larger purchases and more expensive investments. Plus, unlike a flexible revolving line of credit, a business installation loan will have a fixed amount that needs to be paid back, even if you’re not using the money at the moment.
Depending on your business needs and financial situation, a revolving line of credit can offer many advantages. It’s important to know the differences before you commit to any course of action since borrowing money is often a common desire for business owners across the United States. As you can see, a revolving line of credit may be able to access you cash when you need it most.