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Access to adequate funding poses a major challenge to businesses. At one point or another, businesses will need funding to actualize their set business goals, tend to emergencies or take up fresh opportunities. One common way to access these funds is business credit, which may be revolving credit or non-revolving credit.
Keep reading to find out more about the meaning of revolving and non-revolving credit, and their differences.
Where a borrowing party takes up a credit to a particular limit, and then pays back the borrowed money overtime, he has obtained a revolving credit. Paying up the loans will give the borrower the space to borrow even more. This is notably as against the conventional business loans, in which case the borrower is issued the loan upfront and they are to pay back in full. If the borrower wants to access new loans in the future, they have to re-apply.
So, revolving credit essentially operates like a credit card. The borrower is allowed a fixed maximum amount of credit (known as the credit limit), from which they’re expected to borrow. As they repay the loans, the credit limit is replenished, thereby giving the opportunity to borrow more.
For instance, ABC Corp has opened a revolving line of credit at a bank with a credit limit of $500,000. If ABC Corp borrows $100,000, they have $400,000 left to max out the credit limit. However, if they pay back, say, $50,000, they now have $450,000 more to borrow.
In short, there is a credit source that they can always return back to.
Unlike revolving credit, once non-revolving credit has been used up, then reused or replenished. To gain access to more non-revolving credit, the borrower must re-apply.
Non-revolving Credit usually comes with fixed interest rates and fixed repayment plans. What’s more, non-revolving credit policy is generally strict. For instance, there may be penalties for defaulting on meeting the payment schedule.
Differences Between Revolving and Non-Revolving Credit
1. Credit Sum: In the case of revolving credit, there is no fixed maximum amount of credit that the borrower can have access to. In our example above, ABC Plc can continue to access more credit as much as they desire, so far they keep to the terms.
This isn’t the case for a non-revolving credit. In this case, there is a fixed amount that borrowers can access under a non-revolving credit facility. And once they access this, they have to start repayments.
2. Borrowing Period: For revolving credit, there is no definite period for loan maturity; the borrower can continue taking in new loans as long as he/she regularly repays the borrowed loan and does not exhaust the credit limit.
However with non-revolving credit, the borrower can only access the loan once after which he/she is required to pay back overtime.
3. Rigid/Flexible Payment: The payment schedule for revolving credit is usually flexible while non-revolving credit comes with rigid payment plans in which there may be penalties for defaulting.
Revolving Credit vs Non-revolving Credit: Which is Better?
The answer to this is entirely dependent on a number of factors, including the purpose of the credit as well as the preference of the borrower.
For instance, for a business seeking a line of credit to finance emergencies and unforeseen developments, non-revolving credit will really not be a viable option.
Similarly, for fixed, long-term capital projects, revolving credit may not be ideal.
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