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When cash flows are unpredictable, it's hard to plan for your future bills. A revolving line of credit gives your business a defined credit limit you can draw on, repay, and then draw from again. You'll only pay interest on the portion of the credit you use.
After many years of working with small and mid-sized business (SMB) owners, I believe revolving lines provide some of the best flexibility to address slow periods, unexpected costs, and new opportunities as they arise.
Below, I'll cover the basics of a revolving line of credit so that you can make the best decision for your business.
How Does a Revolving Line of Credit Work?
A revolving line of credit differs from a standard loan in several ways. One major difference is how you receive the money and how you repay it. Term loans provide a single, lump sum of money and require you to repay the entire principal within a fixed repayment period. A revolving line of credit lets you draw on it, as needed, and then repay only the amount you drew.
The minimum payment usually includes the interest from the previous month, plus a small portion of the principal you drew. As you keep making your payments, including your monthly minimum payments, your outstanding balance decreases and your available credit increases.
Many revolving lines have variable interest rates. Variable interest rates can fluctuate depending on changes in the overall financial markets. The sooner you pay off the principal you borrowed, the less interest you'll pay, since interest only applies to the amount you're using.
Some revolving lines work differently. They divide the process into a draw period, when you can borrow money from the line, and a repayment period, when you pay down the total debt and can't draw any more money from the line. The length of time you have to complete your repayment depends on the specific type of revolving line of credit you get.
Revolving Credit vs. Installment Credit
Most forms of business financing fall into one of two categories: revolving credit or installment credit. The main difference comes down to how you receive and repay the funds.
| Feature | Revolving credit | Installment credit |
|---|---|---|
| How you borrow | Draw as needed, up to a limit | One lump sum up front |
| Reusing funds | Pay back and reuse again | Can't reuse after payoff |
| Payment amount | Varies with your balance | Fixed each month |
| Example types of financing | Credit cards, business lines of credit, HELOCs | Term loans, mortgages, auto loans, student loans |
| Use of funds | Irregular costs | Regular costs |
Installment credit works in an entirely different way: Installment loans, such as term loans, mortgages, auto loans, or personal loans, let you borrow a single sum and repay it in equal installments over a fixed repayment period.
Traditional loans don't replenish themselves once you've paid them off. In my experience, many business owners rely on term loans to finance their businesses when their costs are really irregular. A revolving line is designed to meet this kind of expense pattern in a way a fixed loan can't.
Types of Revolving Credit
There are several different types of borrowing built on the same revolving structure:
Credit cards
They're the most familiar form of revolving credit. You get a credit limit, charge purchases, and either carry a balance or pay it off. Many business cards also offer rewards, such as cash back or points on purchases.
Business lines of credit
These are revolving lines designed specifically for company expenditures, usually with greater limits than a credit card and lower interest rates.
Personal lines of credit
They're similar to a business line, but tied to individual finances rather than business finances.
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Home equity lines of credit (HELOCs)
A HELOC is a revolving line backed by the equity in your home. It sets up a draw period, during which you can borrow against your home's value, then a repayment period, during which you repay the borrowed funds.
How To Get a Revolving Line of Credit for Your Business
If you want to establish a revolving line for your business, there are primarily two options. You can choose an unsecured business line of credit or a home equity line of credit. The greatest distinction is collateral.
Unsecured business line of credit
With Clarify Capital, this is revolving financing up to $5 million with APRs as low as 6%. An unsecured line doesn't require pledging your house, equipment, or other assets to obtain it. Unsecured lines base approvals on your company's earnings and your creditworthiness, which is why they fit established businesses (see the requirements listed below). Your own personal property remains outside of this transaction, and the money can enter your account quickly, often the same day.
Home equity line of credit (HELOC)
A HELOC is a form of secured credit, backed by the equity in your home. Because your home serves as collateral for the line, a HELOC usually carries lower rates and longer terms. Clarify Capital's HELOC offers up to $750K, prime-anchored variable interest rates (with APRs as low as prime for well-established borrowers), and a five-year maximum on your initial draw period, followed by repayment terms lasting up to 30 years. Using your home as collateral for a HELOC puts it at risk of foreclosure if you fail to make timely payments.
A HELOC is beneficial for a business owner who owns enough home equity, seeks the most affordable and longest-duration revolving option, and is willing to take the risk of placing their home on the line. An unsecured business line keeps personal property out of the picture, offers quicker access to capital, and carries no risk to your home.
Benefits of Revolving Lines of Credit
Revolving lines of credit have several advantages:
Pay interest only on what you use
You only pay interest on what you use, not on your entire credit limit, so an unused line costs you nothing in interest.
Reuse it again and again
As you pay down your balance, you build up available credit that's ready for you to use again.
Smooth out cash flow irregularities
A line provides coverage for slow periods, delayed customer payments, and unforeseen expenses without requiring multiple applications.
Build business credit
Every on-time payment improves your payment history, and keeping your balance well below your limit lowers your credit utilization ratio. Both can help your credit score over time.
Get quick funding
Whether it's to capitalize on a great deal or to address a rapid increase in costs, quick access to financing lets you respond fast.
Why Business Owners Use Revolving Lines of Credit
Business owners use revolving lines for all kinds of reasons. These are some of the most common ones that I hear from clients.
Everyday bills and expenses
Paying employees, payroll, and utilities when revenue declines.
Inventory and supplies
Purchase inventory before peak season, or buy items in bulk before prices rise.
Rising operating costs
If rent, materials, or labor costs rise, a line lets you absorb the increase without depleting your cash reserves.
Equipment repairs
Repair or replace damaged machinery fast, before it costs you sales.
Slow periods
Support operations during expected downturns, then pay back the borrowed funds when activity returns.
