What is a Revolving Line of Credit?
Revolving Line of Credit a credit card. After you have opened your credit, you can spend up to the credit limit. As long as the credit is available, you can keep making purchases, and if you don’t use the line, it does not expire or close up.
Each use of a revolving credit account is known as a draw. The amount of the draw gets deposited into your checking account which you can use as you like. Funds are available quickly once you initiate a draw, and you can make a draw and have the funds in your account within minutes. Each draw subtracts from the available credit, which limits the amount which can be drawn until outstanding draws are paid back.
It offers a lot of flexibility and is beneficial if you need to fulfill cash flow shortages or make numerous small purchases over a period.
However, the credit limit will be smaller than a non-revolving line. Thus depending on your needs, this can mean limited access to capital.
What Is a Non-Revolving Line of Credit?
A non-revolving line of credit is a lump sum that is paid at once.
These types of lines have lower monthly payments than non-revolving lines of credit. Here, interest rates are lower and usually fixed, so are not going to upturn on a monthly or even yearly, except there are special cases that are included in the loan terms.
To get a non-revolving line of credit, you are required to complete an application to receive a non-revolving line of credit. The difference however is that once the non-revolving line has been paid off, the account is closed. To open another non-revolving line of credit, you must re-apply.
Non-revolving lines of credit allow for better expenditure projections since the loan cost and when it will be paid off are already known before you sign the papers. This is quite different from revolving lines of credit. Also, some non-revolving lines of credit will include a prepayment penalty in their terms. This implies that you must adhere to the amortized schedule and pay off the loan on the listed terms.
Understanding the Differences Between Revolving & Lines of Credit
At the end of the day, deciding between a revolving vs. non-revolving line of credit will depend on what you need the funding for. If you are funding frequent small transactions, then you have to opt for a revolving line of credit. This is because it does not require a normal process every time you need access to new funds.
If you are funding large capital purchases, then a non-revolving line of credit will be your best bet. This has lower monthly payments, and a fixed, lower interest rate.
Advantages of Revolving Credit
- There’s the replenishment of funds which you can use indefinitely, to provide your business with a funding safety-net that can be used flexibly.
- It is an easy and reliable medium for building up your credit score. It provides small business owners with an option of using credit cards to improve credit score.
Disadvantages of Revolving Line of Credit
- Revolving credit has lower maximum credit limits than non-revolving credit, due to higher risk on the lender’s side.
- There are more imposing interest rates than non-revolving credit, due to a higher risk taken by the lender.
Advantages of Non-Revolving Credit
- It is less in interest rates than revolving credit loans since non-revolving credit often requires collateral to qualify.
- There are higher limits than revolving credit lines. Which opens up a bigger space for small business owners to grow and improve.
Disadvantages of Non-Revolving Credit
- Funds do not yield as you pay back the loan. This makes it needed to fill another form to be able to access more funds.
- It may include early repayment penalties, which restricts you from saving money by paying off the loan ahead of schedule.