Revolving Line of Credit

What Is a Revolving Line of Credit?

A revolving line of credit lets business owners like yourself borrow money, pay interest only on what you borrow, and continue to borrow up to your available credit limit. The credit limit is typically based on the borrower's credit score, income, and time in business.

With this type of loan, a lender issues the borrower an account with a set credit limit. You only pay interest on the amount you withdraw. And you can repay and withdraw funds without going through another loan approval process as long as you pay the minimum payment regularly.

The revolving line of credit remains open until the issuer or you decide to close it. You can use the funds to tend to any business needs. It offers flexibility for business owners who want more options for managing and using capital.

Personal lines of credit, business credit cards, business lines of credit, and home equity lines of credit (HELOC) are examples of revolving lines of credit. Also called an open-end credit, a revolving line of credit makes it easy to make purchases or withdraw funds.

Advantages of a Revolving Line of Credit

Revolving lines of credit are a lifeline to many business owners. Ultimately, it's a safe and relatively stress-free loan. Here are a few more benefits of securing a revolving line of credit.

Builds Your Credit Rating

A revolving credit line is a great way to build a credit history for your business. Besides having a good credit report, lenders like to see that you can manage debt properly. This means you pay your balances on time. And if you don't withdraw the maximum amount, it keeps your credit utilization ratio low, which increases your credit score.

High Approval Rates

Revolving lines of credit have high approval rates. So, no matter what industry you're in, the chances are good that you can secure a credit line. Of course, excellent and good credit scores are preferred, but loans are also available for poor credit.

Flexible Financing

One of the main advantages of revolving credit is its flexibility. You can access a line of credit already approved and available. You can simply withdraw at any time for any reason. Many small businesses depend on revolving credit to manage their cash flow gaps.

Competitive APRs

Revolving lines of credit typically have lower interest rates than credit cards. And compared to a short-term loan, you only pay interest on funds you withdraw. A revolving credit line is an affordable option if you need funds to manage day-to-day business expenses.

At Clarify Capital, we work with over 75 lenders to get you the lowest APR available. You can also access a dedicated Clarify adviser to help you choose the best business loan for your needs.

Quick Access to Capital

A revolving line of credit helps you cover unexpected expenses, such as replacing broken equipment. It provides quick access to capital whenever you need it. This is why business owners who want peace of mind apply for revolving credit before they need it.

No Prepayment Penalties

With a revolving credit line, you can repay the money at your own pace (as long as you pay the minimum) so you don't put your business into financial hardship. And when you finance with Clarify Capital, there are no fees for prepayment.

We also ensure you understand your loan's terms and payment schedule. A Clarify adviser will walk you through the application process so that you can choose what works best for your business.

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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.

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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.

FAQs about Revolving Line of Credit

Here are answers to most common questions that business owners have about revolving business credit lines.