Difference Between Revolving Credit and Line of Credit

Is a Revolving Line of Credit Good?

When comparing the difference between revolving credit vs. a line of credit, you may be surprised to find that although there are similarities, they are very different.

The fundamental difference for the small business owner between a revolving credit product and the LOC (line of credit) is how the lender treats the business funding. With the revolver, the traditional lender will provide a credit limit. As the limit is paid down, the account or line stays open until the lender decides to shut it down or the merchant makes that decision.

On the flip side, the line of credit is a one-and-done type of arrangement. Whether it’s a bank, credit union, or online lender/alternative lender, the merchant is provided with working capital. When the cash is paid back, the line is closed by the lender.

You will find that these products are driven by your personal credit score. This financing is not considered a high risk business loan by the loan originator. As an example, when the bank reviews the loan application, the bank will most likely also examine your business credit score, P&L, Balance Sheet statement, and cash flow. Either option is traditionally a secured loan, meaning you are providing personal guarantees in the case of a default.

Business owners must learn more about revolving credit vs. the nonrevolving credit line by reading below to determine which is the best choice for you or your business. You must understand the difference to know which loan options best suit your needs.

What is a Revolving Line of Credit?

A revolving line of credit is a relatively common form of business funding. Most financial institutions offer these financing options along with traditional bank loans. There is a good chance you are familiar with a revolving line of credit as one of your financing options vs. nonrevolving credit. As an example, a business bank or credit union will provide you with the means to borrow up to a predetermined amount of money. This amount of money is considered the loan amount. Look at these financing options as a business cash advance. The difference in the financing is how it’s treated once the money is paid back.

As you make purchases, you will make payments based on what you have spent and the interest that has accumulated, so the amount of your payment may go up or down. This is in contrast to your typical small business loan. The business loan has a set term and interest rate. So like the SBA loan you have a fixed payment over a fixed period of time.

A revolver is similar to a credit card. You are issued a certain amount of credit. This extension of credit is known as your credit limit. Very frequently, businesses will use this to smooth out issues with cash flow. Perhaps think about this as an open-ended term loan. Accelerate your payments and you have a short term loan alternative. You take the cash as you need it and pay it back based on cash flow.

Is a Credit Card A Line of Credit?

In one word, “yes.” One key factor of a revolving line of credit is that once you have paid all or part of the amount spent, those funds or cash become available for spending again. There is no set date for the total payback, so you can continue to borrow as needed. Once you repay the entire amount, you can choose to keep the revolving line of credit open for future use. Like a credit card, you will have a minimum payment.

A revolving line of credit sounds a lot like a credit card, but with a few differences. With a revolving line of credit, you do not need a physical card to make purchases, and your transactions are more similar to a cash advance, where you receive the money upfront. Also, a revolving line of credit typically has lower interest rates than a credit card. A Home Equity Line of Credit (HELOC) or department store card are good examples of revolving credit.

What is a Line of Credit?

Put another way; you could ask, “What ‘s a non-revolving line of credit?” A line of credit that is not revolving works the same way as a revolving line of credit in the beginning. You have a set limit of funds to withdraw and make payments based on the total amount spent within that limit. The difference between revolving credit and a line of credit is that once you have paid back the borrowed funds from a line of credit, they are no longer available for use. Student loans are an excellent example of non-revolving credit. Another form of a non-revolving line of credit is overdraft protection on your business bank account or checking account.

Another significant difference between revolving credit and a line of credit is that you may be able to get a lower interest rate with a line of credit. However, this may be because you are required to put up collateral, pay a penalty fee for paying it off ahead of schedule, apply for a new line of credit if additional funds are needed, or all of the above.

Pros and Cons

Before deciding whether you apply for either form of financing, check your credit history. You will not be issued credit lines if you have bad credit. It’s also essential that you establish strong business credit.

Both of these options provide flexible payments. Both options offer an easy application process. Larger projects, like acquiring real estate, would require a more traditional loan. Still, both revolving and non-revolving lines of credit are great for smaller monetary amounts for projects like remodeling or ad campaigns. Both also provide lower interest rates than credit cards, as well as higher credit thresholds.

On the other hand, both of these options usually have higher rates and lower borrowing amounts than traditional personal or business loans. And if you are unsure about your ability to repay the line of credit when the time comes, then there is a financial risk to be considered. It is always wise to create a detailed budget and do your best to estimate reasonable expectations for future income before applying for any loan or type of credit.

A revolving line of credit provides ongoing access to funds as needed. It also enables you to grow your credit, which will open up more purchasing power and help you raise your credit score. Of the two, this one will most likely have higher interest rates.

A non-revolving line of credit can provide higher lending amounts, lower interest rates, and a predetermined date for repayment, which can help with managing debt. It is also higher maintenance, as you will need to stick to a set payment schedule.

Bear in mind that both forms of revolving credit and nonrevolving credit differ from installment loans, SBA loans, or cash advances like merchant cash advances.

Sunwise Capital

After considering the difference between revolving credit and a line of credit, the best way to determine which one is right for you or your business is to speak with a professional who can answer all your questions.

If your business needs cash, you may want to consider some of the other term loan options available to you. These financing options can range from high-risk business loans to a merchant cash advance or even invoice financing, sometimes called invoice factoring. Each one of these loan types meets a particular need of the borrower. Even if you need an equipment loan or want to consider a microloan or personal loan, Sunwise Capital can help you.

For those of you who do not want to use a traditional personal guarantee, you may consider an unsecured business loan. If you’re confident in your business acumen and have the physical assets, like real estate to back the loan then a secured business loan, with better terms and interest rates may make more sense. The security of an asset helps, especially if you have poor personal credit or even bad credit.

Post COVID-19, for those that have erratic cash flow and revenues, the merchant cash advance is a strong option. Again, bad credit is ok. The key is to work with a lender that listens to your circumstances and understands that any type of financing only works if it works for you.

The experts at SunWise Capital are available to help small businesses succeed through smart financial planning and lending. Learn more about applying for a Business Line of Credit, Revolving Line of Credit, or securing a business credit card today!