As an entrepreneur, you're often faced with circumstances in which you need access to funds—for working capital, special projects, new equipment purchases, whatever the situation may be. Depending on such factors as time in business and credit score though, you might not have the easiest time coming up with the cash needed. Some even resort to utilizing personal credit cards just to keep things running. One option that you could potentially explore as a small business owner in need of additional funds, is revolving credit. Revolving credit is a bit different from other types of credit lines and offers a flexible way to gain access to the financing you require.
Understanding Business Credit
Business credit can get you the money you need for a variety of projects/reasons. Understanding the differences between the kinds of business credit available can help you make a more informed decision regarding what direction you should take.
With most types of business credit, you are only going to pay interest on what you use, not the amount for which you're approved. There are both secured and unsecured lines of business credit. With the secured version, you put down a deposit or some sort of collateral to back the credit. And as far as the unsecured line goes, that requires no such backing.
The three primary types of business credit lines are as follows:
Traditional Unsecured Business Line of Credit
Again, with an unsecured line of credit, you do not have to provide collateral or a deposit. With this, you generally have to have a fairly strong credit score and a business history which the lender can evaluate. Rates on this may be a bit higher than other types of loan products and there could be maintenance fees associated.
Traditional Secured Business Line of Credit
In getting a secured line of credit you are first offering up collateral by way of cash, assets, real estate, etc. to protect the loan. That is to say, if you do default, the lender thus has money or some form of assets to try and recoup their losses. So if you do have a less than a stellar credit score or not enough time in operation, this may be the product for you, as the lending institution has something to help offset the risk. Because you are offering up security on the line, the interest rate here may be lower and maintenance fees far less than with an unsecured line of credit.
Business Credit Card
Just like with a personal credit card, a business credit card gives you a spending limit and you pay on the amount that you use. Your repayments are based on established rates. Unlike personal cards though, business credit cards generally have much higher limits and may also offer benefits that typically you will not see with a normal credit card. Things such as redeemable travel expenses, cashback, and sign on bonuses are all potential perks that come with business credit cards.
So What Exactly Is Revolving Credit?
Revolving credit does differ from traditional lines of credit. While from both, you draw funds as you require them, the revolving line works a bit differently after the money's been drawn.
If you have a traditional line of credit, the availability of funds decreases with each withdrawal and does not subsequently reload. For instance, if you have a line of 40k and you borrow 10k and then you go ahead and repay that 10k with interest, you are still just left with 30k worth of credit from which you can borrow.
Now, with a revolving line of credit once you repay that 10k with interest, you're once again up to that initial 40k amount. Much like a credit card, a revolving line of credit replenishes upon your payments back into it. The good thing about the way this works is that you don't have to continuously reapply. You simply keep paying back what you borrow, and the pool of available money is once again there for you. Some other benefits to consider when thinking about revolving credit:
- You can build up your business credit
- The payment terms are more flexible
- You have the ability to use the funds when you need them
- Some offer cash on demand
The Three Types of Revolving Credit
There are three main types of revolving credit of which you should be aware:
- Short-term revolving lines of credit
- Medium-term revolving lines of credit
- Bank lines of credit
Short-Term Revolving Credit
With this type, you're usually looking at a repayment term of approximately 18 months or less. Similar to a short term loan, the limits you can borrow tend to be lower here and interest rates are also in line with those of short term loans. So while they can be a bit higher than some other kinds of funding available, if you do need to build up your credit and establish more of financial history, this may be the best product for you.
Medium-Term Revolving Credit
Here you can get a higher limit (sometimes over 1 million/). And you also have a year or more in some cases to repay the money borrowed. The application process however for this line is a bit more tedious, not to mention it can be harder to get approval. If you don't need the funds right away, this may be something to look into, especially if the money needed is for more of a long-term project.
Bank Lines of Credit
Banks again offer more traditional options when it comes to lines of credit. And while online and alternative lenders are helping more and more businesses with their funding needs, some still opt to work with banks.
The problem comes with getting approved. The banks want to see higher credit scores, a number of years in business, a certain amount of annual revenue, as well as overall profitability. The application process on this will be long, so be prepared for that, and if you are a new business owner, odds are you will end up getting rejected.
Should You Consider Revolving Credit For Your Business?
If you are in a position where you need cash for working capital, a new marketing initiative, whatever the reason, then checking into a revolving line of credit might be your best bet. It does offer flexibility; the application process is fast and easy and your chances of getting approved especially working with an online lender are higher than with some other loan products.
At First Union, we offer many loan products including a line of credit. If you are in need of funding, call today!