Businesses, especially small ones, rely on loans to ensure their financial future and growth. One of the most utilised loan types is revolving credit, which provides businesses with a steady cash flow whenever they need funds.
However, it’s not enough to only apply for a revolving line of credit. Borrowers also need to know how to navigate it strategically. So, read on for the best tips on how to navigate revolving credit to ensure business growth and financial stability.
Understanding Revolving Credit
Unlike traditional loans, where the borrower gets a lump sum, revolving credit is one that remains available to borrowers even as they make the payment.
With a revolving line of credit, a borrower may access credit up to the limit they agree upon with the lender.
So, with revolving credits, borrowers may borrow money up to the credit limit, pay it back, and borrow again as needed.
Generally, borrowers may repeat the process as many times as needed as long as they do not exceed the limit set by their lender.
Revolving credits are especially beneficial for small businesses as they get access to a set amount of funds readily available whenever an unexpected expense or a bill appears.
In contrast, if a business applies for a different type of loan, such as a term loan, they will receive the funds as a lump sum, which must be repaid as per the loan terms.
This means they won’t have funds down the line, which is exactly why revolving lines of credit are beneficial. Revolving credits ensure steady cash flow that may be accessed whenever a business expense arises.
Effective Strategies For Managing Revolving Credit
When borrowers decide to apply for revolving credits, it’s wise that they have strategies for managing the funds effectively.
Without any strategies in regard to the borrowed money, the business may waste the funds and even go over the set limit.
Businesses can make the most of their revolving line of credit by incorporating the following strategies:
- Budgeting and tracking: It is vital to budget and track expenses in order to ensure business growth. Businesses that stay on top of their expenses and make a budget can be able to ensure the borrowed funds are appropriately utilised.
- Paying more than the minimum: If a business aims to keep its balances as low as possible, it’s advisable to pay as much as it can rather than just the minimum. Otherwise, as the balance increases, so will the minimum monthly payment.
- Understanding interest rates: A revolving line of credit typically come with high interest rates. However, the good thing about these credits is that a business only needs to pay interest rates based on the amount they draw down and not the whole credit limit.
- Balance transfers: Transferring a business balance onto a revolving credit card may help by providing them with promotional lower interest rates for a set period. During that period, the business can have lower monthly payments, which will potentially make it much easier to repay the loan and keep its balance low.
Tips For Improving Your Credit Score With Revolving Credit
Businesses may utilise a line of credit to improve their credit scores by doing the following:
- Keeping credit utilisation low: A business’s usage ratio can significantly impact its credit score. In general, lower ratios are preferable, and keeping a business’s ratio below 30% is frequently advised to improve its credit score.
- Regularly monitoring credit reports: To keep their credit profiles in good shape, businesses need to examine their credit reports on a regular basis and manage their credits responsibly.
- Strategic use of credit cards: Credit cards are an excellent way for businesses to build healthy credit. However, that is only if the business manages credit cards responsibly, meaning using them only for necessary business expenses.
Common Mistakes To Avoid With Revolving Credit
There are some mistakes that businesses typically make with a line of credit.
The most common usually include:
- Relying too heavily on credit: Often, businesses rely too much on revolving credits and use them for everything. This may result in increased balance, which in turn will raise their monthly minimum payments.
- Ignoring payment due dates: A business’s payment history generally has a significant impact on its creditworthiness as a whole. The business’s credit score and, in turn, its credit availability may be impacted by missed payments or defaults.
- Closing old accounts: Even if old accounts are paid off, businesses should avoid closing them as they help maintain healthy credit scores. Paid-off accounts also help prove a business’s creditworthiness to lenders.
Benefits Of Revolving Credits
A revolving line of credit can provide many benefits to businesses, including:
- Flexibility and convenience: Businesses can have readily available funds to use whenever a need or an emergency expense arises. Both flexibility and convenient availability of cash flow are crucial for business growth.
- Building credit history: Revolving credits may be the easiest and fastest way to build a good credit history for some businesses.
- Manageable payments: With a line of credit, the borrower only repays the amount they draw down and not the full credit limit.
Documents To Prepare For Applying For A Revolving Credit
When applying for a revolving line of credit, the borrower should compile the following documents:
- Personal identification
- Proof of income
- Utility bills (proof of address)
- Proof of ABN and GST registration
- Business bank statements
- Trust Deed if the business is held in a trust
- Tax returns
- Financial records (profit and loss statements and your balance sheet)
- A business plan stating how you will use the funds
Frequently Asked Questions
Is revolving credit the best financing option for small businesses?
A line of credit is often considered one of the best financial solutions for small businesses due to its flexibility and convenience. Revolving credit can help businesses finance large purchases and cover both everyday and emergency expenses. Business owners can withdraw as much or as little money as they need.
However, it’s important to carefully assess your financial situation and goals to determine if revolving credit is the right option for your business.
What should I do if my application for revolving credit is denied?
When a business’s application is rejected, there are several things the applicant may do, such as:
- Asking the lender to reconsider
- Checking the business’s credit reports
- Paying down any credit card balances
- Paying off other business debts
- Disputing any inaccurate credit information
- Waiting to apply again
Conclusion
The best way to manage a revolving credit is by thoroughly understanding how it works and how to use it strategically for your business.
The above-mentioned tips and strategies can allow businesses to make the most of their line of credit and always have readily available funds for any emergency expense.