A business revolving line of credit (or credit line) is a fixed maximum amount of money, offered by an external lender, that a company can access periodically or in an all-inclusive lump sum, whenever required.
It functions just like a regular credit card for companies. If a company, for instance, has a fixed revolving line of credit limit set at $20k, it is only able to borrow any amount under that limit; up to the maximum value of the line. This is often used by small businesses and entrepreneurs to access cash when required.
Businesses can borrow from a revolving credit line as and when required. They need not pay back the full amount borrowed unless they decide to sell some or all of their assets, or if they want to borrow for an extended period, say, for a year. Borrowers have the option of paying the full amount back on an annual basis or can choose to repay the amount over a longer period.
The interest rate for a revolving line depends upon the lender and the type of credit offered. Credit card companies offer the lowest rates while business credit offers come with slightly higher rates. There are some advantages and disadvantages associated with each type of revolving. Business credit offers are not restricted to any one sector or industry. Some advantages of business credit include:
Small business owners find business revolving around credit lines a very useful source of financing. It eliminates the hassle of writing multiple checks and going through the application process of getting loans. Instead, business owners just make a single payment every month to the company which offers them the financing. This is a very convenient way of handling finances as well as an efficient way of managing personal finances.
Another advantage of a business revolving line of credit allows business owners to get additional cash flow when they need it most. For instance, if there is a sudden increase in sales or if a particular customer is ready to buy a large number of goods, the business credit line provides instant cash flow. A business credit line also allows business owners to generate higher returns on investment by channelling cash flow through a business credit line that is tax-exempt.
The flexibility of a business revolving line of credit also makes it an attractive option for small business loans. Businesses do not have to make repayments regularly. Instead, they can choose a repayment period that is most suitable for them. This helps business owners to manage cash flow more effectively and also increases the chances of approval for a small business loan.