Is a Revolving Line of Credit Good?
Yes, a revolving line of credit can be good for your business, but only if you use it effectively. Properly managing cash flow is vital to achieving the kind of success you desire for the business you put your heart and soul into. Opening a revolving line of credit is not a new tactic by any means, but it is one of the best ways to help you cover essential costs, especially during slower times of the year. If you are wondering if now is the right time to apply for a revolving line of credit, let this blog serve as a guide to determine if this type of credit is right for you.
What Is a Revolving Line of Credit?
Opening a revolving business line of credit means that you will have an account that you can borrow from whenever you need, assuming you haven't reached your credit limit. This level of flexibility makes it perfect for business owners who need to cover expenses like payroll and inventory during a slower time of year. Some revolving credit examples include:
Business Credit Cards
Personal Lines of Credit
Home Equity Lines of Credit (HELOCs)
So, what is the difference between revolving and non-revolving lines of credit? A non-revolving line of credit cannot be used again once it is paid off. In comparison, a revolving line of credit does not have an end date. As long as the account remains open and you are in good standing with the lender, you can continue to use it.
What Are the Advantages of Revolving Credit?
Are you a seasonal business, an owner who finds themselves in a pinch financially, or an entrepreneur who wants to ensure they have enough capital to operate for the next few months? Then opening a revolving line of credit can be the perfect course of action for various reasons. Here are some advantages.
A Revolving Door Of Funds: With a revolving credit line, you may draw as much capital as you need from a credit line, replace it, and then this amount becomes immediately available to draw from again.
Only Pay For What You Use: Other funding options can require you to pay for the total amount of the credit line borrowed (plus interest). With a revolving line of credit, you only have to pay the amount you pull out and use.
Build Your Credit While Using The Account: Knock out two birds with one stone by building up your credit score while covering current expenses through the same account.
What Are the Disadvantages of Revolving Credit?
One of the more significant hurdles business owners encounter with a revolving line of credit is the temptation to spend more than they can afford. Let’s say you open a revolving line of credit to cover the slower months for your seasonal business. Things are going well, so you decide to take out more money as you are confident things will pick back up, and you will be able to pay everything back on time. Then, the previously thought busy season ends up not being as active as the past few years, and you cannot pay back the money on time and endure the penalties. Revolving lines of credit can be fantastic tools, but you need to be wise about when and how much you plan to use the account. However, it is important to understand that this is not a downside to lines of credit, but any financial venture.
Don’t let the negative aspects downplay the benefits of revolving credit. As we mentioned, for the most part, the disadvantages can be avoided if business owners are calculated and conscious about how they use credit.
What Credit Score Do You Need for a Revolving Line of Credit?
Credit score requirements for revolving lines of credit vary by institution. However, as with most actions that require a credit score, the higher, the better. Generally, having a good to an excellent credit score will ensure you get approved by most lenders. A credit score between 600 and 850 should open most doors to a revolving line of credit with good terms.
How Does a Revolving Line of Credit Affect Credit Score?
One of the easiest ways to visualize how a revolving line of credit can affect your credit score is to think about your personal credit card. What happens if you do not pay the minimum amount or forget to pay it at all when a new month rolls around? Your credit score can take a significant hit. The good news is that opening and using a revolving line of credit never negatively impacts your credit score as long as you make your payments on time. It should be noted that some lines of credit will result in a lender performing a hard pull which can temporarily hurt your credit score. Backd, however, performs a soft pull that does not harm your credit.
Backd: Secure and Fast Financing
Backd cares about getting you the funding you deserve as headache-free as possible. The Backd team helps tailor your funding to fit your business, adjusting payment options for daily, weekly, or semi-monthly payments. By partnering with Backd, you won’t have to worry if you’ll have enough to cover your expenses.
Once you have decided that a line of credit is right for your business, you can fill out a simple application form and get a response within 24 hours.
