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Two of the most popular flexible forms of funding for business borrowers are revolving credit and a line of credit. A lender provides access to funds—up to a certain credit limit—that a borrower can use at his discretion; it’s like a flexible, open-ended loan. Both can be used on an as-needed basis. These two financial products are similar, but there are subtle differences.

A revolving line of credit remains open until either the lender or the borrower closed the account. Revolving credit is very similar to a credit card; in fact, some institutions refer to a revolving credit agreement as a revolving line of credit. When a lender issues revolving credit, it assigns the borrower a specific credit limit. This limit is based on the client’s credit score, income, and credit history. The lending institution grants you a maximum credit limit, which you can use to make purchases at any time and (usually) on any goods. When payments are made on the revolving credit account, those funds become available to borrow again. The credit limit may be used repeatedly as long as you do not exceed the credit limit. Some small business owners use revolving credit to finance expansion or as a safety net in case of cash flow issues. Making regular on-time payments on your revolving line of credit may enable you to increase your maximum credit limit. Interest accrues only on the amount of credit you draw, not on the entire credit line amount.

A line of credit is a one-time arrangement that has a term limit. Once the credit line is paid off, the account is closed. There are similar features to a revolving line of credit – a credit limit is set and the funds can be used for a variety of purposes, and interest is charged. A major exception is that the amount of available credit does not replenish after payments are made. Once you pay off your line of credit, the account is closed.

How Lines of Credit Differ From Traditional Loans

Both revolving credit and lines of credit are different from traditional loans which have specific purchasing purposes in mind. You must tell the lender what you are going to use the money for ahead of time and, unlike with a line of credit or revolving credit, you may not deviate from that. With traditional loans you are charged interest once the loan is given to you and funds are transferred unlike lines of credit where you are not charged interest until you use some of the funds.

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