What is a revolving line of credit?
A small business revolving line of credit is a lending solution that operates similarly to a credit card. This form of funding allows users to borrow up to a specific limit – say $50,000 – and pay interest only on the money borrowed for an open-ended period of time. The borrower can draw and repay capital as long as they go over their limit. It is “revolving” as you can access the original funding levels once you’ve repaid the borrowed capital in full.
Here are the pros and cons of a revolving line of credit.
- A revolving line of credit allows you to manage cash flow during slow business periods.
- You can borrow what you need and repay what you use. You will only pay interest on what you have borrowed from that line.
- It can boost your business credit score.
- These forms of funding are difficult to qualify for, especially in tight economic conditions.
- You might pay additional fees and charges even if you have a low-interest rate.
- They typically have lower borrowing limits, meaning there are typically better solutions.
Current Business Financing Concerns
As we noted, the cons of a revolving line of credit can outweigh the positives. The key challenge is that businesses struggle to obtain this type of funding. In addition, in tight conditions, even firms with solid financial metrics might not obtain the same amount of funding as they have in the past.
Small businesses could consider other solutions like invoice factoring instead.
Invoice factoring has evolved into a leading solution to manage cash flow. Should liquidity challenges affect major companies – small- to mid-sized businesses can use existing customer invoices to get working capital immediately.
Many companies use credit lines and pay interest to fill cash flow gaps and waiting for slow-paying customers to pay outstanding invoices. Instead, they can get immediate positive cash flow by selling their outstanding receivables for the full value minus a small fee.