Difference Between Revolving Credit and Line of Credit

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.

Is a Revolving Line of Credit Good?

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

What is a Revolving Line of Credit?

A revolving line of credit is a relatively common form of business finance. Most financial institutions offer these funding options.  There is a good chance you are familiar with a revolving line of credit as a financing option vs. nonrevolving credit.  A business, bank, or credit unions will provide you with the means to borrow up to a predetermined amount of money.

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. 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 flows.

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 become available for spending again. There is not a 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 the 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 is 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 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 the 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. 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 business credit cards today!

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