revolving line of credit vs credit card

Revolving Line Of Credit: Calculate The Interest And Payment | Lendio

6 min read • Jun 24, 2022 • Barry Eitel

Small businesses know the importance of staying flexible and agile. Especially in the early days, expensive challenges and unexpected opportunities can appear without much notice. This is why a revolving line of credit is a very popular choice with business owners.

Like the seasons revolve, so do business cycles. Costs expand and contract over time. Growth usually happens in spurts. With a revolving line of credit, entrepreneurs can access financing as it is needed.

What Is A Revolving Line Of Credit?

A revolving line of credit is a form of financing that is meant to be there right when you need it. Also known as a business line of credit or revolving account, in a revolving line of credit, financiers approve a certain amount of potential funds, i.e., credit, that they will lend to borrowers. Borrowers can then access these funds as expenses arise.

If a borrower does not pay down how much credit they used within a repayment period (usually monthly), the financier typically charges interest on the remaining balance.

Revolving Line Of Credit Vs. Small Business Loan Vs. Business Credit Card

A revolving line of credit is more similar to a business credit card than a small business loan. Unlike most small business loans, like term loans, borrowers do not receive a large disbursement upfront that requires regular repayments. 

Revolving lines of credit are often unsecured, like credit cards, meaning they don’t require collateral. Some larger lines of credit, usually ones over $100,000, will require borrowers to offer cash or assets as collateral.

You can often use revolving lines of credit for purchases you cannot pay with a business credit card, like rent or bulk inventory.

A common form of revolving line of credit for businesses is commercial building equity line of credit, where a borrower receives a loan in the amount of equity in their commercial property. The property serves as collateral.

Why Choose A Revolving Line Of Credit?

As an example, imagine a contractor business that specializes in installing revolving doors. In a nearby city, a new law is passed that requires commercial buildings to meet new energy conservation thresholds. The business owner knows this will mean a flood of new business, but they do not have the inventory to supply all the glass and other materials to meet demand. 

In this situation, a revolving line of credit would work great. The business could buy the materials needed, and only the inventory needed, to meet the coming influx of demand. The business could do this even if revenue was currently slow and, later, pay down the funds used after serving all the new customers.

Revolving Lines Of Credit For People With Bad Credit

In terms of creditworthiness requirements, revolving lines of credit occupy a space between small business loans and business credit cards.

Your credit score does not need to be as high as with some traditional forms of small business lending, like a term loan from a bank. The application process is also less demanding.

However, since revolving lines of credit usually have higher credit limits and lower interest rates compared to credit cards, they are a bit harder to qualify for.

Revolving line of credit requirements include:

  • A credit score of at least 560 
  • Have been in business for at least 6 months
  • $50,000 or more in annual revenue.

Fortunately, a credit score bottom threshold of 560 is pretty forgiving—if your score is below that, you should focus on building up your credit.

Revolving Line Of Credit Alternatives

If your credit is very suboptimal or your business is very new, you can seek other types of business loans for bad credit. Many people can get approved for business credit cards within minutes. You might also seek out a startup loan if your company has been around for at least a few months. Many entrepreneurs make use of personal funds or investors to get a business going in its first few weeks.  

Revolving Line Of Credit Calculator

Interest rates for revolving lines can range widely, from 10% to 60% as of June 2022. This will depend on multiple factors, including the applicant’s personal credit score, business revenue, and the credit amount requested.

With some data, you can easily calculate your repayment requirements using a free online calculator.

Financiers calculate revolving line of credit interest based on the principal balance amount. This is the amount of balance outstanding for the previous billing cycle, often 30 days. Interest will only be charged on the funds you have drawn from the revolving line of credit account.

Usually, interest is calculated based on a whole year and displayed as a percentage. The revolving line of credit interest formula is the principal balance multiplied by the interest rate multiplied by the number of days in a given month. This number is then divided by 365, the number of days in a year.

When you know the basic figures, calculating the interest for a revolving line of credit is straightforward. Business lines of credit are built for simplicity—due to their flexibility and accessibility, they remain a great option for all sorts of small businesses.

Apply For A Revolving Line Of Credit

You can see what sort of revolving line of credit your business can be approved for online right now. Looking over your options is free and fast, and the process doesn’t require a hard credit check.

To apply for a revolving line of credit, you will be asked to provide your personal credit score and some basic information about your business: how long you’ve been open, your annual revenue, and your industry. Some financiers might ask for details on your business financials or your company’s business credit score if it has one.

 

Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. 

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Barry Eitel

Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.