Coming up with the funds you need to make essential purchases for your small business is always a challenge. Often, it can be difficult to get approved for funding. For entrepreneurs, this sometimes means relying on personal credit cards and their own credit history to access the capital they need to keep moving forward.
According to one survey, 27% of small businesses can’t get the funding they need, and 46% of small businesses use personal credit cards to get access to capital.
But other options, such as revolving credit, are available to help you get the funds you need in a flexible and ongoing way. If you’re curious about revolving credit and how it compares to other business lines of credit, you’ll find the answers below.
What Are the Different Types of Business Credit?
There are myriad reasons why small businesses need more capital than they have on hand. When it’s time to grow, your revenue may not cover the necessary expenses, especially when you have to take overhead and the general cost of doing business into account.
Business credit helps you get capital right when you need it. But not all business credit is the same.
Technically, a line of business credit is a loan. However, it doesn’t work the same way as traditional business loans. Instead of accepting a lump sum and paying back your loan in installments, your line of credit gives you access to funds up to your credit limit.
Furthermore, you only pay interest on the money you’ve drawn (much like a personal credit card).
Technically, there are two models for a business line of credit: secured and unsecured. A secured line of credit is backed by a cash deposit or collateral which you must provide before receiving the line of credit. An unsecured line of credit has no collateral associated with it.
Nonetheless, there are four different types of business credit lines worth exploring beyond revolving credit.
Traditional Unsecured Business Line of Credit
A traditional unsecured business line of credit requires no collateral, nor does it require a down payment. It’s typically easier to gain approval for an unsecured business line of credit than over types of business credit, especially if your business has a strong credit history. It’s also much less of a hassle, as the application process is much easier.
However, this line of credit may come with higher interest rates and a maintenance fee.
Traditional Secured Business Line of Credit
In this arrangement, you must put up something of value as collateral to obtain the line of credit. This could be a business asset, real estate or a cash deposit. This serves as a guarantee to the lending institution—if you default on repayment, they can claim your collateral as payment instead.
A secured business line of credit usually has better terms because of the collateral involved. It may have lower interest rates, lower or no maintenance fees and more flexible repayment options.
Business Credit Card
A business credit card works similarly to a personal credit card. You have a credit limit and can use the card at the point-of-sale to make business purchases. Interest is only accrued on the credit you use, and you make repayments based on set rates.
The key difference between business and personal cards is that business credit cards typically come with perks and rewards that benefit your business, not just you as an individual. The limits on business credit cards also tend to be much higher than on personal credit cards. Rewards could include a sign-on bonus, redeemable points toward business expenses (like travel), cash back, gift cards and more.
A business credit card is an example of a revolving credit account, but credit cards typically have smaller credit limits than a traditional line of credit.
Business Real Estate Line of Credit
A business real estate line of credit is like a home equity line of credit, but it’s designed for businesses that own real estate. You can use the equity in your own home or the equity in other properties you own to secure this loan. If you want an unsecured business real estate line of credit, your FICO may be the determining factor.
What Is Revolving Credit?
There is a difference between the definition of revolving credit and the definition of a traditional line of credit. Although both give you access to a pool of funds which you can draw from as needed, a revolving line of credit operates differently after you’ve drawn.
A traditional line of credit doesn’t replenish the pool when you pay off what you borrow. So, if you have a credit limit of $50,000, draw $25,000 from it, then pay off $25,000 of your primary balance (plus interest) through repayment, you only have $25,000 worth of credit left to draw from.
A revolving line of credit works more like a credit card. You can draw up to your credit limit, but once you pay it off, you still have a pool of credit to draw from. So, if you used $25,000 of your $50,000 credit limit then pay it off, you’ll have $50,000 worth of credit to draw from again.
The key benefit to this is that you don’t have to keep applying for loans or additional lines of credit. Once that line of credit is secured, it’s always there for as long as you have credit available and you are in good standing.
There are additional benefits to this model, as well, including:
- The opportunity to separate personal and business lines of credit
- The ability to build business credit
- More flexible payment terms
- Cash on-demand (in some arrangements)
- You can use your line of credit when you need it.
Revolving Credit Examples
Aside from business credit cards, which we’ve already covered, there are three other types of business revolving credit you should be aware of. They are:
- Short-term revolving lines of credit
- Medium-term revolving lines of credit
- Bank lines of credit
Short-Term Revolving Credit
A short-term revolving line of credit has a repayment term of 18 months or less. It is similar to a short-term loan in the amount of funding you can secure, and its interest rates are similar as well. The limits on short-term lines of credit are generally lower than longer-term options.
If you are operating a new business and you don’t have much credit established yet, a short-term line of credit may be a good option for you. It’s much easier to get approved. Just keep in mind that the interest rates on a short-term line of credit will be higher.
Medium-Term Revolving Credit
A medium-term revolving line of credit gives you the option to repay over one or more years. You can also secure a higher limit (some credit lines can reach over $1 million).
However, applying for a medium-term option is typically more difficult. You’ll need a significant amount of documentation to apply, and your application will take longer to process. This is a good option if you are an established small business planning for the future, but not if you need capital immediately.
Bank Lines of Credit
There are plenty of nonbank lenders and revolving credit facilities online that can provide you with revolving lines of credit. However, you can still walk into any bank branch and apply for a traditional option.
Bank lines of credit tend to be the most difficult to qualify for. You’ll need a very high personal credit score for the bank to even consider you. Furthermore, your business must already be profitable.
Bank loan applications take time, and many banks would need you to show up in-person to qualify. This is not typically a viable option for startups or new business owners, but bank loans have some of the lowest interest rates on the market.
Is a Revolving Credit Agreement Right for You?
If you need working capital to make important business purchases and help your business grow, a revolving line of credit can help you plan for the future. You have several options to choose from. If you’re a new business owner, this can be a confusing process.