Looking for a Line of Credit? There are differences.
There are so many options for financing your business at different stages and for different needs, that it can be difficult to decide which one is best for your business and your situation. The way to make the correct decision is to be educated about each one.
One of the options available is a small business line-of-credit, but there are two different types of lines-of-credit from which to choose. What is a line-of-credit, what are the options, and which one is best for you?
What is a Line-of-Credit?
A line-of-credit is financing that, after approved, can be used at any time. You can use all of it, or any portion of it, for any reason. Similar to a credit card in terms of access, no physical card is needed. You can simply have the funds deposited into your account and use as needed.
The repayment terms differ greatly from that of a traditional loan, in that you can pay as you want. A line-of-credit also typically has a lower interest rate than a credit card, but higher than a traditional term loan.
Revolving vs. Non-Revolving Line-of-Credit
While each meet the definition of a line-of-credit because funds are available for use for anything, at any time, there is one glaring difference.
A revolving line-of-credit replenishes as it is repaid. If you have a $10,000 line-of-credit, and you spend $5,000, you will have $5,000 left on the line-of-credit. After you pay $500 back, you will have $5,500 available to you again. Funds continue to become available after they are repayed, indefinitely.
A non-revolving line of credit does not replenish. If you have $10,000 and spend $5,000, whatever you pay back simply pays down the $5,000 of funds used. It is not added back to your available credit.
Comparison to Other Loans
While the difference in a revolving line-of-credit and a traditional term loan may be obvious, it becomes a little more clouded when you compare a term loan to a non-revolving line-of-credit. The biggest differences are fund use and repayment terms.
A term loan is given to be used at a specific time and repayment begins as scheduled whether you have used the funds or not. A line-of-credit is available as needed and paid back as it is used.