Many businesses at one time or another may have cash flow challenges. One popular option to obtain short term funding is to secure a revolving line of credit. This not only helps with basic day to day operations, such as meeting payroll, purchasing supplies, increasing working capital or obtaining extra inventory; it also provides many other benefits.
What is a revolving line of business credit?
In basic terms, a revolving business credit line refers to a bank or merchant offering a specified amount of always available credit for an undetermined amount of time. The debt is repaid periodically and can be borrowed again once it is repaid. There is no set monthly payment, but interest accumulates and is capitalized like any other credit.
As a business makes payments on the revolving credit line, those funds become available for borrowing again. The credit limit may be used again and again as long as you do not exceed the maximum limit.
Having access to a source of funding is an essential part of success in business, but not all forms of financing are created equal. Unlike other kinds of lending, a revolving business credit line offers a number of advantages over other types of funding such as:
- Flexible Payment Terms– Traditional term loans require set monthly payments that can potentially present a challenge to the growth of a start-up business. On the other hand, a revolving credit line offers flexible repayment terms. Unlike a term loan, if a business has a slow month it can pay the minimum amount due.
- Personal and Business Separation– One of the challenges many business owners face is keeping personal and business expenses completely separate. The benefit of a revolving business credit line is that it enables you to streamline and track your business expenses since your credit line is dedicated solely for business.
- Access to Cash on Demand – Unlike a traditional loan, a revolving credit line enables you to source funding before your business actually needs it. Because of the cyclical nature of business, you may find yourself wanting to borrow money to take care of your company’s short terms needs. By being able to access funds on the credit line at any time you can keep your business running smoothly, day in and day out.
- Builds Business Credit– Businesses need to establish ratings with the major business credit reporting agencies. Using a business revolving line of credit allows you to build a positive payment history that appears on your company’s business credit report. This will allow you to potentially obtain future credit for your business based on your company’s creditworthiness.
- Flexibilityof Usage – A closed-end loan is for a particular use whereas a revolving business credit line allows you to decide what to spend your cash on for your company. Since the credit line is revolving a business can use the cash for multiple purchases compared to a loan that can only be used for one purpose.
A business revolving line of credit provides companies the flexibility needed to meet their short term funding needs. When the need for cash is there, funds are there. By having access to cash on demand, you can take your mind off of money and focus on running and growing a successful business.
Marco Carbajo is a business credit expert, author, speaker and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and AllBusiness.com. His articles and blog, BusinessCreditBlogger.com, have been featured in Fox Small Business, American Express Small Business, Business Week, The Washington Post, The New York Times, The San Francisco Tribune, Alltop, and Entrepreneur Connect.