Business Loans

Revolving Line Of Credit: Calculate The Interest And Payment

Nov 21, 2022 • 10+ min read
revolving line of credit vs credit card
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      Small businesses know the importance of staying flexible and agile. It’s not unusual for expensive challenges and unexpected opportunities to appear without much notice, especially in the early days of a new business. As a result, a revolving line of credit is a popular financing solution among many business owners. 

      Just as the seasons change, so businesses evolve over time. Costs expand and contract. Growth often happens in spurts. With a revolving line of credit, entrepreneurs have the freedom to access financing as they need it. 

      Read on to learn more about revolving lines of credit and how they work. You’ll also discover the pros and cons of this flexible form of business financing, along with tips on how to apply for this type of account if you determine that it’s a good fit for your business.

      What Is A Revolving Line Of Credit?

      A revolving line of credit is a form of financing that offers business owners the flexibility to borrow money on an as-needed basis. Also known as a business line of credit, a revolving line of credit is similar to a credit card in several ways. 

      There’s no lump sum disbursement of funds like you would receive with a business loan. Instead, with a business line of credit you are able to request funds as your company needs them.

      How Does a Revolving Line of Credit Work?

      When your business qualifies for a new revolving line of credit, the lender will set a cap on the amount of money your company can borrow at any given time. This cap is more commonly known as the credit limit. 

      Depending on your borrowing terms, your business may be able to borrow money against its credit line (up to the credit limit on the account) on a repeated basis. Of course, you will need to make sure your account remains on time and in good standing. You must also avoid maxing out your credit limit to be able to take advantage of this benefit (assuming it’s available). If you do max out the credit limit, however, you may be able to pay down the debt and access the same credit line again afterwards. 

      If your account has a draw period, once that expires you would no longer be able to borrow against the credit line. However, your business would remain responsible for repaying the funds it borrowed, plus any interest and fees that apply to the debt. 

      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 it is to a small business loan. Unlike most small business loans, such as term loans, line of credit borrowers do not receive a large disbursement of funds up front that requires regular repayments. You only receive funds as needed, and your monthly repayment schedule may vary according to how much you borrow and the APR and fees on your account.

      Another similarity between revolving lines of credit and credit cards is the fact that both are often unsecured. This means they don’t require collateral. Some larger lines of credit (such as those over $100,000), however, may require borrowers to offer cash or assets as collateral.On the other hand, you can often use revolving lines of credit for purchases that you cannot pay for with a business credit card, like rent or bulk inventory. A revolving line of credit can give you access to cash like a business loan might do. You may be able to access cash via a small business credit card as well, but you’ll typically have to pay cash advance fees and a higher APR for this privilege.

      Types of Revolving Credit

      The term revolving credit refers to a type of account that allows a customer to borrow and repay money on a repeated basis. The most common examples of revolving credit are as follows. 

      • Credit cards are perhaps the most recognizable form of revolving credit. Both consumers and businesses may qualify for credit card accounts. In general, better credit scores lead to better interest rates and borrowing terms. 
      • A business line of credit is a type of revolving credit that’s available for business purposes. This borrowing option can be secured or unsecured, with varying credit limits, loan terms, and interest rates based on the creditworthiness of the business and other factors. 
      • A commercial building equity line of credit is a type of financing where the borrower receives a line of credit based on the amount of equity that’s available in their commercial property. The property serves as collateral.
      • A home equity line of credit or HELOC is another type of revolving credit in which a borrower’s property serves as collateral to secure the account. However, in this scenario the borrower is an individual consumer, not a business. 

      Pros and Cons of Revolving Line of Credit

      As with any type of financing, there are benefits and drawbacks to using a revolving line of credit to fund your business. Here are some of the pros and cons you should consider if you’re thinking about applying for a revolving line of credit. 

      ProsCons
      Only borrow as much as you needPossible increases on variable interest rates
      With good credit, potentially lower interest rates than those on credit cardsPossible damage to business and personal credit, if mismanaged. 
      Only pay interest on the amount you borrowMay have to provide a personal guarantee
      Keeps personal finances and credit separate from business finances and creditRisk business or personal assets at risk in the event of default on secured lines of credit
      Might help you establish business creditPotentially high interest rates and fees, depending on credit and other factors

      Why Choose A Revolving Line Of Credit?

      There are numerous reasons your business may want to consider opening a revolving line of credit. Here are a few signs that this type of account might work well for your company. 

      Your business needs: 

      • Access to a flexible source of funding. 
      • Working capital on a periodic or seasonal basis. 
      • A non-specific amount of funding for an upcoming project or investment.
      • The ability to borrow money quickly in an emergency.
      • A way to build better business credit history and credit scores for the future.

      Revolving Lines Of Credit For People With Bad Credit

      In terms of credit requirements, revolving lines of credit occupy a space between small business loans and business credit cards. Your credit score may not need to be as high as it does to qualify for some traditional forms of small business lending, like a term loan from a bank. The application process for revolving lines of credit also tends to be less demanding, depending on the lender.

      On the other hand, revolving lines of credit usually have higher credit limits and lower interest rates than credit cards do. That often makes them harder to qualify for than a business credit card account.

      Depending on the lender, you might be able to qualify for a revolving line of credit with:

      • A personal credit score of at least 560 
      • At least 6 months in business
      • $50,000 or more in annual revenue

      It’s important to understand that a FICO® Score of 560 is considered to be poor. As a result, you may face higher interest rates, higher fees, and less attractive borrowing terms if you do qualify for a revolving line of credit with a bad credit score. So, if your credit score is too low to qualify for a revolving line of credit, or if you hope to qualify for better borrowing terms in the future, you should focus on rebuilding your credit, as well.

      Revolving Line Of Credit Alternatives

      If your credit is 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. Other entrepreneurs may opt to 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. The interest rate a lender offers you will depend on multiple factors, including your personal credit score, business revenue, and the amount of credit you request. 

      Whatever terms a lender offers you, it’s important to do the math before you commit to a revolving line of credit. You want to make sure that payments on the account won’t put your business in a financial bind. A free online calculator can help you crunch the numbers.

      Revolving Line of Credit Interest Formula

      In general, you pay interest only on a revolving line of credit if you carry a balance on the account. But there may be fees associated with the account that apply on a monthly or annual basis as well. So be sure to add that cost into your budget calculations. 

      Depending on your terms, a lender may calculate revolving line of credit interest based on your principal balance—aka the amount of balance outstanding for the previous billing cycle (often 30 days). You’ll usually only pay interest on the funds you withdraw from the revolving line of credit account. Unlike credit cards, you likely won’t pay interest on interest.

      The lender may calculate your interest based on a whole year and display it as a percentage. From there, 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 to determine the interest you’ll pay on your revolving line of credit.

      Revolving Line of Credit Interest Formula
      (Principal Balance X Interest Rate X Days In Month) / 365

      When you know the basic figures, calculating the interest for a revolving line of credit is straightforward. Business lines of credit are built to be simple due to their flexibility and accessibility. They remain a great option for many types of small businesses.

      Apply For A Revolving Line Of Credit

      If you’re interested in a revolving line of credit, it’s easy to see what sort of revolving line of credit your business can be approved for online. Looking over your financing options is simple and fast, and the process often doesn’t require a hard credit check.To apply for a revolving line of credit, you’ll need 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.

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      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. 

      About the author
      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.

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