Almost all business owners occasionally have need of extra funding, whether it’s for short-term requirements like payroll or purchasing inventory, or longer-term needs like major equipment purchases or business growth opportunities. In some cases, this funding can be provided by traditional lenders like banks, credit unions, and other lending institutions, and then again, there are times when alternative lenders can fill the gap with needed funding. One of the most flexible types of funding is a line of credit, and one specific type of credit line is called a revolving credit account. There are differences and points of similarity between these two terms, as discussed below.
In a revolving credit account, a borrower applies for and is approved for funding, and then begins to use that funding for whatever purpose is needed to operate the business. Each month after borrowing, a certain amount is paid back into that revolving credit account, which then makes it usable again by the borrower. For instance, if a revolving credit account for $10,000 is set up, and a borrower withdraws $3,500 for business expenses, the balance of the revolving credit account would be $6,500. When the borrower repays $500 at the end of the month, the balance of the revolving account then become $7,000, all of which is then usable for other business purposes.
Line of credit
A line of credit provides to the borrower a fixed ceiling credit amount, e.g. $50,000. When the line of credit has been approved, the borrower can then use any amount between $1 and $50,000, and interest is paid only on the actual amount which has been borrowed. The big difference between this and a revolving type of credit line is the fact that as the borrower pays down on the borrowed amount, it is not replenished and made usable again. For example, if the line of credit started at $10,000 and $3,500 was borrowed, a payment amount of $500 would leave an available credit line balance of $6,500, not $7,000.
The great thing about lines of credit and revolving accounts is the flexibility they provide to business owners, especially given the fact that daily business operations as well as longer-term requirements can be so unpredictable at times.