A revolving line of credit is a credit account you continue to borrow from and pay off repeatedly over time, making it an extremely desirable tool for business owners and entrepreneurs. This kind of funding allows you to invest in growth initiatives, cover cash flow gaps, grow your business credit score, and so much more.
You may already be familiar with the concept by different names, like credit cards and home equity lines of credit. But how does a revolving credit line work, exactly? We’ll walk you through all the details, best practices, and how to apply for a revolving line of credit.
The most common revolving credit examples include credit cards and lines of credit. Of the lines of credit, you will most commonly see:
A home equity line of credit (HELOC)
A personal line of credit (PLOC)
A business line of credit (BLOC)
The names do not indicate what you must spend the credit on, but instead indicate what’s at stake if you fail to make payments. This means you can use all of these lines of credit for anything (such as your business), but keep in mind the consequences of not making enough to pay back each type. For example, if you don’t pay a HELOC back, you could lose your home to foreclosure because the equity in your home secures the loan.
So, which line of credit should you choose for business funding? Some may be comfortable putting their home on the line for their business, while others may feel that’s too risky and opt for a BLOC instead. If you find you don’t meet certain requirements for a BLOC, like minimum revenue or time in operation, then a PLOC or HELOC might be a better fit.
When it comes to credit repayments, there are two fundamental types—revolving and installment. Both can be great options for a business owner, but it’s important to understand the differences between how the two work. To illustrate, we’ll use a hypothetical business owner, Beatrice, who wants to open her own restaurant, Beatrice’s Bistro.
Before Beatrice can open her bistro, she must secure enough financing. After considering her options, she decides to apply for a business loan, which is a type of installment credit. She’s familiar with the process, as she just paid off her auto loan and also has a mortgage for her home (both other types of installment credit).
After some budgeting and calculations, Beatrice decides she needs $30,000 to get the ball rolling. Her credit is excellent, so when she applies for a business loan she secures a fixed interest rate at 5.5% and has a 5-year term to pay off the loan in monthly installments. The lending institution processes her loan, and Beatrice receives a lump sum of $30,000 to use for her bistro. She immediately uses that money to secure a location and other big purchases for the restaurant. Then, each month over the next five years, Beatrice pays $573.03 to the lending institution until the final month of the five year period, when her total loan amount and interest are paid off.
Fast forward a few years, and Beatrice’s Bistro is booming with business. But with so much business, her kitchen equipment is starting to wear down, and she finds herself calling the handyman more frequently. She realizes it’s time to update her bistro’s kitchen, but she doesn’t like the idea of sinking that much cash into equipment at the moment.
Instead, she decides to use her business line of credit (BLOC), which she opened last year as a safety net in the event of unexpected expenses. Her BLOC limit is $20,000, and she’ll need about $16,000 to update everything. Beatrice knows carrying a $16,000 balance on her $20,000 BLOC may lower her credit score due to the high credit utilization ratio (the amount of credit used versus what’s available). She also doesn’t want to spend too much on BLOC interest payments, since hers is set at a variable rate (meaning the interest rate can fluctuate over time). With all this in mind, Beatrice decides to make equipment purchases one by one over the next few months.
She uses funds from her BLOC to buy a $1,500 industrial fryer one month, and pays it off the next. Then she buys a $4,500 commercial gas stove she’s been eyeing, and pays it off in multiple payments over the holiday months when her cash flow is high. She continues buying the new equipment she needs one piece at a time, paying off each amount as she goes, until she finally has her new kitchen and has paid off her BLOC back down to a $0 balance. Her $20,000 BLOC still remains active and ready for the next big business purchase Beatrice may need to make to fulfill her dreams as a restaurant owner.
The more available credit you have on a revolving line of credit, the better, as having more available credit can actually help your credit score. However, how much you borrow of that available amount is a different story. The standard credit utilization rule to maintain good credit is around 30%, meaning you don’t borrow more than 30% of your available credit.
From Beatrice’s Bistro example above, you’ll recall Beatrice didn’t want to spend $16,000 of her $20,000 BLOC on all of her restaurant equipment at once. This would have put her at 80% credit utilization, which would make her credit score drop until she lowered that percentage. Instead, she made smaller purchases one at a time, paying each off in between purchases, so her credit utilization remained under 30% and her credit score didn’t suffer.
Backd offers easy and fast funding for lines of credit from $20k to $2 million, giving you the power and flexibility to grow and upgrade your business. You can draw funds at any time during the term period and use them any way you like. Curious how to qualify? You must:
Have a business bank account
Be a United States-based business
Have been in operation for at least 12 months
Have a $300,000 minimum annual revenue
Have a 600+ FICO credit score
If this sounds like you, you can apply online right now in just a few minutes—no obligations, no credit pull. Click here to apply, get funded, and build the business of your dreams!