Revolving credit can be a lifeline when your small business faces an emergency, or simply needs extra cash for unexpected short-term purchases. There are two main types of revolving credit: business lines of credit (also called revolving lines of credit) and business credit cards. Both allow you to borrow money as needed within a pre-set spending limit, and you only pay interest on the money you use.
For a revolving line of credit, we recommend Kabbage because they have a simple and quick application process that can line you up with capital in 1-3 business days.
This article will explain how your small business can make the most of revolving credit, including:
- Where To Get Revolving Credit
- How Revolving Credit Works
- Business Loans vs. Revolving Credit
- Secured vs. Unsecured Revolving Credit
- When to Apply for Revolving Credit
- How to Avoid Your Credit Limit from Being Reduced
Where To Get Revolving Credit
There are many different places to get a revolving credit account. As mentioned above, revolving credit can be split into two categories: revolving lines of credit and business credit cards.
Getting a revolving line of credit from your local bank is probably the least expensive option if you have excellent personal credit (700+ FICO score), a cash flow positive business, and don’t mind waiting 1 to 2 months.
However, if you want cash quickly, getting a business credit card or a line of credit from an online alternative lender will be your best bet. Here are some options:
Best Revolving Line of Credit for Small Businesses: Kabbage
Kabbage is our pick for small businesses wanting a revolving line of credit because they work with lower credit borrowers, have a simple and quick application process, and provide funding within 1-3 business days (sometimes, the same day that you apply).
You can get a line of credit as low as $2K or as high as $150K at Kabbage. At a minimum, you need a FICO score of 550 and annual business revenues of $50K to qualify. You must pay back what you borrow in 12 months or less. The APR for Kabbage credit lines typically ranges between 40-60 %. While this sounds very high, it’s not out of the ordinary for a short-term lender that works with lower credit business owners.
In our experience, small business owners love the convenience of Kabbage. You can get pre-approved online in just a few minutes. There’s no paperwork because Kabbage can sync up with other business accounts you may have, such as PayPal or Quickbooks. If you qualify, Kabbage can send funds to a PayPal account in a few hours or to a business bank account in 1-3 business days.
Best Credit Card for Small Businesses: Chase Ink Business CashSM
Our favorite business credit card is the Chase Ink Business CashSM. Why? One word: rewards! Like many credit cards, Chase offers cash back rewards for purchases charged to the card, something you won’t get with a line of credit like Kabbage.
The Chase Ink Business cards offer a high degree of flexibility plus great rates. You can earn great cash back rewards on purchases with the Chase Ink Business CashSM Credit Card or you can choose the Chase Ink Business Preferred Credit Card which offers you the ability to redeem points for travel, cash back or gift cards.
Other Options:
BlueVine: Good for Newer Businesses (600+ FICO)
BlueVine offers lines of credit up to $30,000 for small business owners with higher than a 600 credit score and revenues of at least $60K per year. Called “Flex Credit,” these lines of credit are a good fit for newer businesses because you only need to be in business for 6 months to be eligible. The approximate APR range for BlueVine’s Flex Credit is 20-60 %.
Getting Flex Credit is fast and simple. Everything’s done online; you can apply and have funds in your account in 1-2 business days. You repay the funds in fixed weekly installments over 6 months.
Lending Club: Good for Established Businesses Needing More Capital (600+ FICO):
Lending Club provides short-term business loans and lines of credit. Their lines of credit are designed for established businesses needing large amounts of capital. The credit lines go up to $300,000. To qualify, you at least need a 600 FICO score, $75,000 in annual revenues, and 2 years in business.
The APR is actually the best out of the bunch, ranging from about 9.77 % to 35.71 %. If you have a strong credit score, you may get a low interest rate here. The downside to Lending Club is that there’s a 1-2 % draw fee each time you borrow funds, which the other lenders do not charge.
Other Types of Revolving Credit for Business Owners
If you’re a B2B business and invoice your customers, learn more about invoice factoring lines of credit. BlueVine is our top pick for invoice factoring. Homeowners can tap into the equity in their homes to get a home equity line of credit, which can be used for business purposes.
How Revolving Credit Works
If you’ve used a credit card, you already understand the basics of how revolving credit works. The lender gives you a pre-set spending limit, and you can borrow up to the limit as needed. As you pay back what you borrowed, your available credit goes back up. The main advantage of a revolving line of credit is that you only pay interest on the money that you use.
Example: If you have $100K of revolving credit and only use $30,000 to buy inventory, you’ll only pay interest on the $30K. Until you pay back the $30K, your credit limit is reduced to $70K. Once you pay back the $30K, your original credit limit is restored, and you can spend up to $100K.
There are two main kinds of revolving credit for small business owners:
- Business lines of credit
- Business credit cards (see our tips here on credit card financing)
While there are a lot of similarities between these two types of revolving credit, the differences are important. Business credit cards are convenient for quick purchases, but you can’t use them for everything. For instance, if you’re having trouble making payroll, you can’t ask an employee if you can pay them by credit card. Also, most business credit cards (with the exception of some Amex business cards, which don’t have pre-set limits) tend to have spending limits less than $50K.
With business lines of credit, you can borrow a much larger amount of money. The funds are sent directly to your account, so you can use them for almost any purpose, such as paying employees and vendors. The downside is that these can be costlier than a credit card, depending on the lender you choose.
Business Loans vs. Business Revolving Credit
Traditional business term loans and revolving credit work differently and serve different purposes. However, they can both complement each other and help a small business grow. Here’s a breakdown of when to use what:
Traditional Business Term Loan | Revolving Credit | |
|---|---|---|
How it Works | Borrow lump sum of money all at once and pay it back in full | Get pre-set spending limit and borrow up to the limit as needed |
Typical Repayment Term | 1-10 years (usually repay in daily or monthly installments) | 6-12 months (usually repay in weekly installments) |
Pros |
|
|
Cons |
|
|
Best for | Long-term business needs or purchase of a specific asset | Short-term or unpredictable business needs or business emergencies |
Example | $100,000 10-year loan at 10 % interest rate You pay $1,321 per month for 120 months | $100,000 6-month line of credit at 10 % interest rate. You withdraw only $30,000. You pay $1,292 per week for 24 weeks |
The most important distinction to understand between a business loan and a line of credit is that you only pay interest on money you use with a line of credit. This makes lines of credit more economical in the long-run. However, since lines of credit are generally for a shorter term, your payments may be higher on a line of credit depending on how much of the available credit you’ve accessed.
With business loans, you borrow a large amount of money upfront. Business loans are better for predictable, long-term investments in your business where you’re fairly certain that you’ll need a specific amount of money. For example, if you need money to hire new employees or to purchase a piece of equipment, then a business loan is probably a better option.
On the other hand, a revolving line of credit or credit card is ideal when you need extra cash to handle unexpected emergency situations. Take the case of AJ Saleem, the owner of Suprex Private Tutoring in Houston, Texas. In early May, Saleem noticed a small hole in the ceiling of his office but didn’t think much of it. Then, a rain storm came which broke through the hole and flooded the office, causing thousands of dollars in damage. Fortunately, Saleem was able to use his Chase Business Credit Card to quickly hire workers to make repairs. In a few days, he was back to work.
AJ Saleem, the owner of Suprex Private Tutoring, with a student. Saleem used revolving credit (a credit card) to make emergency repairs after a rain storm flooded his business in Houston, TX.
Lines of credit are also great for day-to-day operational expenses or for plugging gaps in your cash flow. For example, if you’re short on money to make payroll one month, or an unexpectedly large order comes in, a line of credit or credit card is better equipped than a loan to handle that.
Secured vs. Unsecured Revolving Credit
Revolving credit may be unsecured or secured by collateral, a lien, and/or a personal guarantee.
As you might have already guessed, getting an unsecured line of credit is difficult because it leaves the lender with nothing if your business can’t pay back the money you borrowed. You must generally have excellent credit to get an unsecured line of credit from a bank.
Alternative lenders, like BlueVine, OnDeck, and Kabbage, who we mentioned above as places to get lines of credit, typically require a personal guarantee and place a lien on business assets. A personal guarantee means you’ll be personally liable for the line of credit if the business cannot afford to pay the money back. Liens allow the lender to sell your business assets if the business is unable to pay back the loan. Kabbage doesn’t require a personal guarantee, but they do place a lien on business assets for lines of credit over $20K.
Business credit cards don’t require collateral or liens. However, you will still have to sign a personal guarantee.
Another word of caution: Business revolving credit accounts usually show up only on your business credit report, not on your consumer credit report, so they can’t help you build personal credit (some credit cards, like Amex, do report to your consumer credit report). That being said, if you’re delinquent on a business credit card or line of credit, that can damage your personal credit score.
When to Apply for Revolving Credit
Edward Castaño, VP of Marketing at online lender BlueVine, says, “The best time to apply for a line of credit or business credit card is when you don’t need it.” If you get revolving credit in advance of when you need it, it will be available when you experience a shortage in cash flow or an emergency.
That being said, it may not be a good idea to apply for revolving credit too early before your business has had a chance to establish itself. If you’re not producing any revenues and your business hasn’t built up a good business credit score, then you may not quality, or you may end up paying more than you would have if you waited a few months.
How to Avoid Your Credit Limit from Being Reduced
In some circumstances, lenders may reduce your credit line or remove your access to the funds altogether. If this happens, you may have to pay back everything you borrowed within a short period of time, typically 90 days. This happened to millions of small businesses after the recession in 2008, leaving them scrambling for funding.
According to Castaño, there are two main situations where a lender may pull your credit line or reduce your credit limit:
- You make late payments.
- There’s a significant change in the business’ financial stability or revenues (periodically, you’ll be asked to provide updated documentation of business revenues).
If you find yourself unable to make timely payments, stop borrowing money and communicate with the lender, advises Castaño.
“The best thing the small business can do, apart from ensuring they will not fail on their obligations, is to work with [the lender] on rebuilding trust and proactively communicating about their business and any potential issues. The business owner should aim to show both good control of the situation as well as a good understanding of where the business is going in the near and long term.” –Edward Castaño, BlueVine
Bottom Line
Revolving credit can be a vital source of extra capital for your small business when you’re in an emergency or face a cash flow shortage. However, for certain types of purchases, traditional business loans may be the better choice. In many cases, small businesses benefit from both. Take the time to evaluate why you need money before deciding how to borrow.
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