What Is a Revolving Line of Credit Used For?
Companies use a revolving line of credit to handle various business needs. Here are a few common examples of how small business owners use this type of credit to grow their brands.
Seasonal Fluctuations
Most businesses go through high and low sales seasons depending on their industry, product, or service. So, a revolving line of credit is a reliable way to cover cash flow gaps and keep the business operating even when sales are low. Access to extra cash is also helpful when your business needs to buy more inventory during peak seasons.
Expanding Business Locations
An expansion of any kind is an exciting time for business owners. Opening a new location can also be stressful because there are many moving parts, some of which you may not have accounted for. In this case, a revolving line of credit can help you smooth things out to avoid delays.
Hiring Employees
Not having enough employees to attend to customers or make products can slow a business’s growth. But what if you don’t have room in your budget to hire employees? Secure a revolving line of credit and access funds that let you invest in the right people when needed.
Buying New Equipment
Buying new equipment can be a huge capital expense. But you need materials, machinery, and inventory to fulfill orders and grow your business. With a revolving credit line, you can buy new equipment and still have money for other operating expenses.
Invoicing Gaps
Businesses that sell on credit often experience cash flow gaps when waiting for customers to pay invoices. For startups and new businesses, payments coming in on time are crucial. There’s nothing worse than waiting for late payments when you have bills to pay yourself.
Secure a revolving line of credit and have access to immediate cash when you need it. It helps you deal with the worst and makes you feel more in control of your business when you can pay your bills on time, no matter what.
Who Is a Revolving Line of Credit Ideal For?
A revolving line of credit is ideal for business owners looking for a flexible financing option. With a credit line, you borrow and repay the funds as often as needed. It works best for companies that need short-term business financing regularly, such as seasonal businesses.
The type of loan you should get depends on your business needs, such as if you need access to cash to cover working capital expenses as they arise. So, if you want to avoid applying for financing every time you need cash, a revolving line of credit is the way to go for your business.
Revolving Line of Credit vs. Other Loan Types
If you want to make a large one-time purchase, a short-term business loan is a better solution. With a short-term loan or installment loan, you receive a lump sum. You repay the loan amount plus interest in equal monthly payments over a period of time until it’s paid off. See how Clarify Capital can secure a fast business loan for you.
Auto loans, personal loans, student loans, or home equity loans also differ from revolving credit, as you receive the amount of money you need and repay over a set repayment period.
How Do You Qualify for a Revolving Line of Credit?
To qualify for a revolving credit account, most lenders require businesses to have a strong revenue, a FICO score, and be operational for at least six months. Since Clarify Capital works mostly with online lenders, we have fewer strict requirements than traditional loans from banks and credit unions.
To prepare for your loan application, make sure to check your credit score and get the following documents ready:
- Legal proofs, such as a driver’s license, passport, federal tax ID, or employer identification number (EIN)
- A copy of your business license or DBA
- Most recent bank statements (three to six months)
- One to two years of business tax returns
- One to two years of personal tax returns
- Financial statements, such as profit and loss (P&L) statements and balance sheets
Every lender has different requirements, interest rates, and repayment terms. Loans can also be secured credit or unsecured credit. Some types of revolving credit lines can be secured to guarantee approval or lower interest rates. Lenders may ask for collateral in the form of inventory, equipment, or real estate.
Speak to a Clarify adviser for more information, or submit an online application to see your funding options for free.
Top Use Cases for Revolving Credit Line
A revolving line of credit allows you to manage business costs as they come up. Below are popular ways business owners use financing to achieve their goals.
Unexpected Expenses
Having flexible access to funding keeps you prepared for whatever life throws your way. Pay for one-time, unanticipated costs as they arise using your revolving line of credit.
Inventory
Place buying orders and get the supplies you need to achieve success. An infusion of working capital allows you to make forward-looking business choices.
Operational Costs
Free up additional working capital to be used where you need it most. Flexibly withdraw funding to ensure your regularly occurring bills are paid on time and in full.
Coronavirus Assistance
The COVID-19 pandemic disrupted the business ecosystem, disproportionately affecting small businesses. A revolving line of credit can be used as a lifeline when needed. Smooth over cash flow and tap into funds as needed during these unprecedented times.
