As a small business owner, it’s important for you to understand the types of financing available to you as well as which options will better suit your needs. “Revolving line of credit” and “line of credit” may sound similar — and in fact they are — but with some important differences you need to be aware of.
Let’s start with the similarities, however. Both of these types of financing offer borrowers flexibility with how the funds are spent. And in both cases, you will only pay interest on the money you actually use, not the entire credit line. But here come the differences.
Perhaps the biggest differences are these:
- A revolving line of credit can be used and repaid over and over again up to a certain credit limit — and typically remains open indefinitely. An example: credit cards.
- A line of credit is a one-time financial agreement that’s closed when the set amount of credit has been spent. An example: home equity lines of credit (HELOCs).
Business owners can gain significant peace of mind by having funds available to draw from for unexpected or planned purchases. But you must be smart, drawing funds only when required and paying them back according to the terms agreed to.
Comparing Lines of Credit to Traditional Loans
Two more traditional loans often sought by small business owners are term loans and equipment financing. Unlike both lines of credit, those installment loans (similar to a mortgage or auto loan) are made with specific purchasing purposes in mind. You must state what the money is going to be used for and you can’t deviate from that once you’ve received the funds. Another difference between traditional loans and lines of credit is that line of credit payments tend to be more irregular while the repayment terms of a term loan or equipment financing will usually include a specific monthly amount.
Lines of Credit and Your Credit Score
Any type of credit used irresponsibly has the potential to hurt your credit score. What you need to be cognizant of with respect to either line of credit type is how much credit you’re using; it’s a good idea to keep your credit utilization rate to 30% or below or your credit score could be negatively affected. However, if you make payments on time and keep your credit use low, that can benefit your credit score.
The Bottom Line
You should think carefully before deciding to apply for a revolving line of credit, a line of credit or any other type of business financing. A revolving line of credit such as a credit card is typically more appropriate for smaller, everyday purchases while a line of credit is generally used more for larger purchases. As with all funding options, using traditional lenders like banks may prove disappointing but you may be pleasantly surprised about how much you qualify for with an alternative lender.
Clear Skies Capital has helped many business owners determine whether a revolving line of credit, line of credit or other funding option is best for them and get the financing they need in a timely fashion. Contact us today at 800-230-9822 to discuss your company’s needs.