Utilizing Revolving Credit Lines for Your Small Business

Utilizing revolving credit lines can provide you with great financial flexibility. Revolving credit allows you to determine how much to spend and how much to pay off each month. You will be given limits, but otherwise revolving credit much more flexible than other financing options. Evaluating the pros and cons of revolving credit will help you determine if it is the right option.

Benefits of Revolving Credit

The biggest benefit of revolving credit is the tremendous amount of flexibility it provides for your small business financing needs. From month to month, your business will experience profit cycles and swings. During the slow months that do not show great profits, you may use more of your revolving credit line to meet your business expenses. Even payroll and advertising expenses can be placed on a credit card, if necessary. You can pay down the loan balance when your business profits are steadily increasing.

Keeping your debt balanced between installment loans and revolving loans will raise your credit score. Most initial business financing, such as loans secured by the Small Business Administration or investors, will be extended as an installment loan. This means you will pay down a principal loan with monthly payments. These payments will be consistent each month. Revolving debt is usually used to meet monthly expenses once a business has already obtained initial financing. Credit ratings companies focus on diversified debt, meaning you will earn points if you keep both types on your records. 

Drawbacks of Revolving Credit

The biggest drawback with this type of credit is the possibility to incur huge debt loads without keeping track of your spending. Companies and individual consumers alike suffer from spending problems with the "free money" concept of credit. It is easy to spend until you reach your limit and only  pay a minimum fee each month rather than the full balance. However, you need to properly balance your books and cut costs when you are approaching your limits. It is best to pay down your balance each month to reduce the interest you will be charged. It is also better for your credit score if you pay down your balance.

A second disadvantage to revolving credit is the interest rates can adjust on the card over time. While rates will not adjust on existing debt, they may adjust on future debt. This means your purchases one month may cost you much less in interest than your purchases the next month. You must have the discipline to curb spending when your rates are high.