Looking for a Line of Credit? There are differences.
What is a line of credit? What’s the difference between a revolving line of credit and a non-revolving line of credit? Which one is best for your small business financing needs?
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 repaid, 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.