Advantages of a Revolving Credit Line

 

A revolving line of credit provides business and personal borrowers flexibility in meeting financial obligations, particularly when cash is temporarily short.

Credit vs. Loan

A revolving line of credit is different than a traditional loan. A typical, closed-end loan is a set amount of money loaned for a specific purpose to be repaid in set amounts on agreed dates. A 30-year, fixed-rate home mortgage is a clear example of a closed-end loan.

Open-ended credit, such as a revolving line of credit, can be a fixed or flexible amount. It can be for a wide variety of purposes. Repayment terms are flexible within agreed limits. Finally, it is usually for an indefinite period.

Cash on Your Schedule 

Among the advantages of a revolving line of credit for your business or for you personally is that you and the lender have agreed that cash will be there when you want it. There is no need to find a lender, apply for a loan and wait for approval. When the need is there, funds are there.

A credit card is a good example of a revolving line of credit. You are pre-approved for a certain amount of money and can draw on it at any time. A revolving line of credit for a business works in similar fashion, but the money is available from the lender instead of from a card.

Flexibility of Use

A revolving line of credit allows you to decide on what to spend your cash. A closed-end loan will be for a particular use. A business might need a piece of equipment, or an individual might need to add a room to a home. A loan can be used for only that.

With a revolving line of credit, a business can use available funds to purchase equipment, finance a company event or pay bills until money owed the business is collected.

Smoothing Financial Rough Spots

Many businesses or individuals have good credit scores but very uneven cash flow. A commission-only salesman who sells airplanes might make a very good living on one or two sales a year. A line of credit allows him to keep current on obligations in the months when cash flow is low.

A seasonal business is much the same. Retailers do the majority of their business between September and December. A line of credit can allow them to bring on needed staff early in that cycle knowing the ability to meet the added costs will be there in a few months.

Repayment Flexibility

With a revolving line of credit, the borrower has flexibility as to how and when the loan is repaid. Again, citing the example of seasonal businesses, with plenty of cash on hand after their busy season, a seasonal business can postpone repayment on a revolving line of credit until cash flow supports it.

Whether personal or business, if your credit standing allows you to borrow and repay with interest within the agreed terms, a revolving line of credit provides flexibility, convenience and liquidity.