Firstly, ask yourself:
- What do I require funding for?
- Will I need funding on an ongoing basis?
- How much funding do I require?
- How often will I need to withdraw funds?
Revolving Credit vs Non Revolving Line of Credit: What’s the difference?
1. Revolving
vs non revolving
Revolving line of credit
With a revolving line of credit, you can draw funds and pay back the money on an ongoing basis. Let’s say you obtain a revolving business line of credit for $10,000 and draw the entire amount. You then pay back $2,000. This payment frees up more funds should you need to draw money again.
Non revolving line of credit
With a non revolving line of credit, you can’t redraw money
if you have reached your maximum limit. A non revolving line of credit is less
suitable for financing ongoing business expenses.
2. Interest
Rate
Non revolving credit lines tend to have lower interest rates
than revolving line of credit interest rates because you can only borrow the
money once. Lenders also consider your creditworthiness when determining your
interest rate.
3. Payment
Schedule
Revolving line of credit
You can borrow the entire credit limit, pay it back, and
then borrow it again with a revolving line of credit. This process makes it
difficult to estimate your payments and keep a budget.
Non revolving line of credit
The payment schedule is more predictable with a non
revolving line of credit. Because you receive your money as a lump sum, you’ll
know the exact amount you can borrow upfront.
4. Borrowing
amount
You may have greater purchasing power with a non revolving
line of credit. However, this is dependent on your:
- Business revenue
- Credit history
- Income
- Credit score
Pro-Tip: Payments and interest can vary more with a revolving line of credit than with a non revolving line of credit. Banks and lenders often view a revolving line of credit as presenting a higher risk than a non revolving line of credit.
Pros and Cons of Non Revolving Credit
Advantage of Non Revolving Credit
- Draw from a line of credit when you need it - a non
revolving line of credit still has flexibility. You can draw from a line of credit
as business expenses or new projects arise.
- Better expense management -a non revolving line of credit sets you up to efficiently manage your
business expenses and debt. You’ll know how much you can spend and your monthly
payments.
- Lower Interest rates - a non revolving line of credit can
save you money and help you pay off the debt faster.
Disadvantages of Non Revolving Credit
- Shorter-term loan - a non revolving line of credit is
generally used for a short-term because you can’t re-borrow the funds. Once you
finish paying off the line of credit, the lender will close your account, which
is not helpful if you want to improve your credit score.
- Must complete another application to continue borrowing - let’s say you pay off your non revolving line of credit but need more money; you’ll have to go through the application process again. This process will add an inquiry to your credit report.
Pros and Cons of Revolving Credit
Advantage of Revolving Credit
- Borrow money continuously - as long as you make regular
payments, you can keep borrowing money. You don’t need to reapply for a
revolving line of credit or prove you meet the credit requirements every time
you require money.
- Improve your credit with timely payments - a revolving line
of credit generally remains in use for extended periods, helping improve your credit score with ongoing payment history; which could make it easier for you to receive funding, such as business credit card funding, later on.
- Minimal limitations on using the funds - you can use the
funds for almost any business expense.
Disadvantages of Revolving Credit
- Higher risk of reusing the money - you might be tempted to
overspend with a revolving line of credit.
- The payment plan might be too flexible - your payment plan
could vary greatly depending on how much you draw when you draw it and your
interest rate. If you cannot make on-time payments, this could hurt your credit
score or even subject you to costly penalties.
Non Revolving Credit Lines May Be a Happy Medium
A non revolving line of credit is a cross between a
revolving line of credit and a traditional business loan. Non revolving credit
lines are great for business owners with flexible spending needs who want
predictable payments.
If you’re interested in exploring how a non revolving line
of credit could help your business, check out BlueVine. BlueVine has low rates,
a quick approval process, and lets you borrow up to $250,000. Learn more about
BlueVine’s loan options.
