Revolving Credit Line

A revolving credit line is a very common form of credit given to both businesses and individuals. A revolving credit line involves an amount of money a lender is willing to extend to a borrower, smaller amounts of which may be used or re-paid as the terms of the credit agreement specify.

This is just a fancy way of saying that a revolving credit line is essentially a credit card. Credit cards each have a credit limit that the borrower may borrow up to but the borrower is not required to borrow up to the credit limit nor are they required to pay it all back at once. The difference between a revolving line of credit that a business might have and what the average consumer has with a credit card is that business credit lines are often much, much larger and (may) not involve an actual card that needs to be used.

Businesses that utilize their revolving lines of credit only pay interest on the amounts of money they use and only for while it has not yet been repaid, just like a credit card, though they may sometimes incur service or account fees even if the credit is not being used. Revolving credit lines can be both secured, in that some form of collateral, either from the business or the business owner personally, is required, or un-secured in which credit is given based on the credit worthiness of the borrower or the lender's past business dealing with the borrower.

A revolving credit line is fundamentally different from a term loan in that, so long as the borrower and lender both agree to it, it could essentially be around forever, continually drawn from and repaid, whereas a term loan is a lump sum amount that has a set series of repayment dates and a fixed end by which the loan should be repaid.

Even successful businesses are often in need of short term credit in order to fund large orders that they may not have the on-hand cash to fulfill. Having a revolving line of credit allows a business, especially a growing business, access to ready cash to fund successively larger orders while keeping existing cash on hand to fund regular operations.

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This page was last edited on 13 October 2020, at 10:27.