Fund Your Business With a Revolving Line of Credit
A revolving line of credit allows you to borrow funds and only pay interest on the amount that you borrow. If the borrowed funds are paid back before the close of the draw period, you can borrow those funds again. This is what makes it revolving.
This is a great tool for small businesses that need working capital to finance growth or for ongoing operations.
Defining a Revolving Line of Credit
In most cases- but not all, a revolving line of credit is a loan that is secured by real estate or other collateral. When you are approved for a revolving line of credit, it is divided into two parts:
- Draw period
- Repayment period
You can borrow money during the draw period. You do not start paying interest until you borrow from it and you are only required to make interest payments. You can pay extra, which reduces your outstanding balance and allows you to borrow that money again.
Draw periods vary from one lender to the next, but typically only last for 1 to 2 years. Once the draw period ends, the lender may renew the loan, which extends your draw period.
On the other hand, the lender may call the loan, which means it must be repaid in full. At that point, the lender will convert it to a structured business loan that will be paid back via fixed monthly payments made up of principal plus interest.
Revolving Lines of Credit Types
A revolving line of credit is a specific type of loan. Below are some of the most common types of revolving lines of credit.
- Home Equity Line of Credit (HELOC)
- Credit Card
- Personal Line of Credit
- Business Line of Credit
While most of these are similar, credit cards are slightly different. Funds borrowed from credit cards are almost always unsecured. Due to this, the interest rates on credit cards are often higher than other types of revolving lines of credit.
How to Get a Revolving Line of Credit
Here are the steps to getting a revolving line of credit:
- Identify potential collateral
- Choose the best option for your situation
- Choose a lender
- Apply for the line of credit
- Accept terms and close
Once you close, you’ll be able to access the funds within a few days. For online lenders, it typically takes a few days to get the funds in your account, but some offer same-day funding.
Advantages & Disadvantages of Revolving Lines of Credit
Below, we will look at the advantages and disadvantages of revolving lines of credit:
- You don’t pay interest until you withdraw funds
- You only pay interest on what you borrow, not the full amount
- Once you pay down the balance, the money is available again
- Interest rates on revolving lines of credit are typically lower than other types
- Unsecured lines do charge higher interest rates than secured lines or other loans
- The draw period usually lasts 12 to 24 months, then must be renewed or paid in full
- Some lines are not convertible to a structured loan. If the lender does not renew the line, and you can’t find another one to refinance it, you must pay it back in full.
Despite these disadvantages, the advantages make this type of funding ideal for business owners. If you want to learn more about revolving lines of credit for your business, contact Skogen Capital Lending today.