Need some extra cash to get the wheels turning on your business or business project? Maybe you’re worried about depleting your cash reserves too quickly while taking a risk on a new venture. Whatever it is, there are multiple ways to secure financing for a business if needed: loans, mortgages, grants, credit, and more.
One of the easiest ways to secure financing, however, is establishing a line of credit. The application process is quicker and easier with less scrutiny. Lines of credit can be very useful for people or businesses that experience sharp fluctuations in cash balances or unexpected expenses. But there’s more than one way to access a line of credit: either as revolving or non-revolving lines of credit.
So what’s the difference between the two? What are the benefits and detractors for each? We lay that all out for you below. Keep reading!
You’re probably most familiar with this one. According to CreditCards.com, a revolving line of credit refers to a bank or merchant offering a certain amount of always available credit to an individual or corporation for an undetermined amount of time. A credit limit is established, funds can be used for a variety of purposes, interest is charged normally, and payments may be made at any time. The debt is repaid periodically and can be borrowed again once it is repaid.
Borrowing with a credit card is similar to using a revolving line of credit, with some key differences. According to Investopedia, there is no physical card required for revolving credit, and it does not require a specific purchase beforehand or at the time of borrowing. Revolving credit allows money to be transferred into a bank account for any reason. An actual transaction does not need to have been made yet. It’s very similar to a cash advance, where funds are made available up front. For this reason, revolving credit typically has significantly lower interest rates compared to credit cards.
As with any kind of financing, a bank or merchant considers several factors regarding the borrower’s ability to pay before issuing revolving credit. For organizations seeking revolving credit, a financial institution reviews the company’s balance statement, income statement, and statement of cash flows.
It’s very similar to a revolving line of credit; however, Investopedia puts it best: The only fundamental difference between a revolving line of credit and a non-revolving line of credit is what happens to your available funds after you have made a payment on the account.
Whereas a revolving line of credit allows the credit line to remain open regardless of when you spend or pay off your debt, a non-revolving line of credit can’t be used again after it’s paid off.
How does that work exactly? Well, non-revolving lines of credit have the same features as revolving credit with one major exception: The pool of available credit does not replenish after payments are made. Once you pay down the line of credit, the account is closed and cannot be used again.
We parse out what the similarities and differences between these two options below.
So, beyond that, what are the differences, the pros and cons between the lines of credit?
In conclusion, these flexible financing options can be great for some situations and less great for others. The first step in choosing the right kind of financing is knowing your options and understanding what you and your business need and are able to manage effectively.