Cash on Demand: Understanding A Revolving Line of Credit
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Definition
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A revolving line of credit is a borrowing arrangement that gives businesses access to a set amount of funds. Businesses can borrow any amount within that set limit. As you make payments, your credit limit will be restored, which you can now use again for any business purpose.
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Business uses for revolving line of credit
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Revolving lines of credit can be used to cover a business's cash flow needs. It can provide working capital so that the business can continue with its day-to-day operations. Revolving lines of credit also help with emergencies and any other unforeseen incidents.
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Secured vs. Unsecured revolving line of credit
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Secured revolving lines of credit require property and assets as security, while unsecured revolving lines of credit don’t. Instead, lenders will base approval on creditworthiness and guarantees. Due to higher risk, unsecured revolving lines of credit have higher interest rates than secured ones.
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Examples of revolving line of credit
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Some examples of revolving lines of credit are secured or unsecured overdrafts, invoice finance, trade and import finance, credit cards, and personal lines of credit.
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Advantages of revolving line of credit
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Revolving lines of credit can grant businesses fast access to funds, allowing them to address their financial needs quickly. Since the line of credit renews, businesses can use the funds over and over again provided that they make payments. The funds can be used in any way that supports the business, like covering cash flow gaps and supporting daily expenses.
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What is a Revolving Line of Credit?
A revolving line of credit is a borrowing arrangement that gives borrowers access to a pre-approved amount of funds. Businesses can borrow funds within the credit limit. Once the amount is repaid, the limit renews, and the funds are available again. Simply put, the funds can be borrowed, repaid, and borrowed again and again in a revolving manner, hence the name.
Revolving lines of credit are invaluable to businesses because they help manage pressing financial needs and cover day-to-day expenses.
Here are the key features of a revolving line of credit:
- Credit Limit: The lender establishes a maximum credit limit based on the borrower's creditworthiness. Borrowers can only access funds within this limit.
- As-needed Borrowing: Unlike term loans where the funds are provided in a lump sum upfront, revolving lines of credit allow borrowers to access funds as needed. Borrowers can use and repay funds whenever needed, provided the amount is within the credit limit.
- Revolving Nature: As borrowed amounts are repaid, the funds become available again for future borrowing.
- Interest Charges: Interest is charged only on the amount of funds actually borrowed, not on the entire credit limit. Some lines of credit may have line fees or other fees so it’s important to understand the fee structure in every loan offer.
- Short-Term Financing: Revolving lines of credit are typically used for short-term financing needs, such as managing working capital, covering unexpected costs, or taking advantage of business opportunities.
Business Uses for a Revolving Line of Credit
Cash flow needs
Revolving lines of credit can cover gaps in cash flow. Businesses can access funds in the case of seasonal downturns, uneven cash flow, and other issues.
Working capital
Businesses can use revolving lines of credit to manage day-to-day operational expenses. These include payroll, bills, rentals, etc.
Emergencies and unexpected expenses
Emergencies can happen anytime. A revolving line of credit can help cover repairs, cleanup, equipment replacement, medical bills, legal fees, and more.
Business Opportunities
Businesses may encounter time-sensitive opportunities. Revolving lines of credit help businesses grab opportunities immediately. For instance, access to funds can help a business take advantage of a one-time discount from a supplier.
Secured vs. Unsecured
Revolving lines of credit can either be secured or unsecured. Secured revolving lines of credit simply means the loan is secured by property or assets. On the other hand, unsecured revolving lines of credit do not require property security. Approval is based on the borrower’s creditworthiness, capacity to service a line of credit and guarantees from the business and its owner. Secured revolving lines of credit typically have lower interest rates.
Examples of Revolving Line of Credit
Secured or Unsecured Overdrafts
Secured and unsecured overdrafts allow businesses to access additional funds beyond their account balance. Overdrafts can help cover any sudden cash flow gaps or unexpected expenses.
Invoice Finance
Invoice financing allows businesses to access a percentage of their invoice’s value as soon as the invoice is written. Through invoice financing, businesses can get access to funds before their customers have paid. Thus, businesses can pay for their expenses and afford to undertake new contracts.
Trade & Import Finance
Trade and import finance help businesses engage in import and export activities. This type of financing provides businesses with the funds to purchase inventory to fulfill orders.
Credit cards
Credit cards are a widely used form of revolving credit. Cardholders are assigned a credit limit, and they can make purchases up to that limit. Minimum monthly payments are required, and interest is charged on any outstanding balance.
Personal Line of Credit
A personal line of credit allows an individual to access funds within a credit limit. The borrower can borrow, repay, and borrow again, with interest only being charged on the outstanding balance.
Advantages of Revolving Line of Credit for Small Businesses
- Fast access to funds: Businesses can access funds whenever they need, as long as the amount is within the credit limit. This fast access helps businesses manage cash flow issues, emergencies, and time-sensitive opportunities.
- Renewing source of funding: Revolving lines of credit renew as they are paid down, which means that as long as borrowers are paying, they can continue to gain access to funds they need for their business.
- Can be used for any legitimate business purpose: Borrowers have the freedom to use their revolving line of credit in any manner as long as it is used for legitimate business purposes. For instance, businesses can choose to allocate parts of their credit limit to certain purposes like emergency preparation.
- Helps manage cash flow through growth periods and seasonal downturns: There will come a time when a business will face financial issues. Cash flow issues, seasonal downturns, and industry-specific problems can put a strain on a business’s finances. A revolving line of credit can help address these issues and keep businesses afloat through hard times.
Get a Revolving Line of Credit for Your Business
Darkhorsefinancial.com.au can help you find the best revolving line of credit for your business. As loan experts, whether you need an overdraft or invoice financing, we can guide you in the right direction. Contact us to find out your options.
