Almost 30% of small businesses fail because they run out of money. Different business loans help to finance new ideas or to bridge financial gaps in an existing company.
When comparing loans, if you’re a small business owner or looking to fund your new business, you’ve most likely seen the terms revolving and non-revolving credit. Understanding these terms is essential to finding the right business loan for you.
So, keep reading to learn five main differences between these types of credit lines.
1. Funds and Limits
Borrowers cannot use non-revolving credit again after they’ve repaid the balance. Therefore, if you want more money, you must reapply for another loan. However, non-revolving lines of credit usually have higher borrowing limits.
The revolving credit definition states borrowers can use the credit repeatedly up to a certain limit. This is as long as the account is open and you make payments on time.
Thus, revolving credit acts like a credit card. The funds replenish as you make repayments. Yet, revolving lines of credit usually have lower borrowing limits.
2. Interest Rates
Non-revolving credit offers lower interest rates than revolving credit. In fact, the interest rate for revolving credit is considerably higher. This is because non-revolving credit requires a collateral pledge before securing the loan.
3. Total Costs
Because non-revolving credit offers a lump sum, the total cost with interest included is clear from the beginning. However, if you default, there will be further penalties.
Depending on how you use a revolving credit line, the total cost can vary greatly. Although the interest rate will stay the same, as you pay back and take out more loans, the amount you owe will change.
4. Borrowing Period
Non-revolving credit lines have a specific borrowing period. Once the borrowers have access to the loan, they must pay it back over a set period of time.
With revolving credit lines, there is no definite period on loan. However, as mentioned before, the borrower can continue taking out new loans if they are being repaid or do not exceed the limit given. Because of this, revolving credit lines offer a flexible repayment schedule.
If you have revolving credit, work with a bookkeeper to track all of your expenses.
5. Security Measures
As stated previously, non-revolving lines of credit often require collateral to qualify. The common type of non-revolving credit is Installment loans. Though lenders like CASH 1 Loans offer both secured and unsecured installment loans which are also the non-revolving types of credit.
On the other hand, a revolving line of credit doesn’t usually require any security to get approved. Instead, lenders base the limit on your credit score, income, and credit history.
Non-Revolving Credit or Revolving Credit: Which to Choose?
There is no right answer for what line of credit you need for your business. Both revolving credit and non-revolving credit are good choices. It all comes down to how much money you need and what you need it for.
If you want to make a large purchase, a non-revolving credit line is better. But, for smaller or everyday expenses, revolving credit is more suitable.
For more related content, make sure to check out our finance section.