Business credit

Revolving line of credit - What is it and how does it work?

Apr 05, 2024

Funds are crucial for the successful operation of any business. They enable companies to cover expenses, invest in growth opportunities, and navigate unforeseen challenges. A revolving line of credit is a valuable financial tool in this regard.

It provides businesses with a predetermined credit limit from which they can draw funds as needed. This flexibility allows businesses to manage cash flow fluctuations, seize timely opportunities, and bridge temporary gaps in revenue.

The revolving nature of the credit line enables repayment and reuse, making it a convenient and adaptable solution for meeting ongoing financial needs.

What is a revolving line of credit?

A revolving line of credit is a versatile financing option that provides businesses with a predetermined credit limit, allowing them to access funds even while repaying the balance.

It enables borrowers to withdraw money as needed, repay it, and then reuse the credit line.

Unlike a traditional loan, a revolving line of credit ensures the uninterrupted availability of funds, making it a convenient solution for managing cash flow fluctuations and meeting immediate financial needs.

Different types of revolving line of credit

Secured business line of credit

To obtain a secured line of credit businesses will typically have to provide business assets or some form of personal guarantees as collateral. The presence of collateral allows lenders to offer competitive interest rates and higher-than-usual credit lines.

However, in case borrowers are not able to pay their dues on time they may have to forfeit whatever assets they have pledged as collateral.

Unsecured business line of credit

An unsecured business revolving line of credit doesn't necessitate collateral; rather, it relies on the creditworthiness of the business and its owners.

Lenders evaluate aspects such as credit history, financial stability, and revenue to establish the credit limit and interest rate.

While unsecured lines of credit may have lower credit limits and higher interest rates compared to secured options, they eliminate the risk of collateral forfeiture.

Asset-based line of credit

An asset-based line of credit makes use of a business's assets, including accounts receivable, inventory, or equipment, as security. Lenders evaluate the worth and liquidity of these assets to establish the credit limit.

This type of revolving line of credit proves advantageous for businesses that possess significant assets but face cash flow limitations. It enables them to leverage these assets to obtain funds for day-to-day operations or pursue expansion opportunities.

Business credit card on revolving line of credit

A business credit card on a revolving line of credit combines the convenience of a credit card with the flexibility of a revolving credit line. The cardholder has a predetermined credit limit, which can be utilized for business expenses.

As the balance is repaid, the credit becomes available again. Business credit cards often offer rewards programs, expense tracking tools, and benefits like purchase protection.

They are suitable for managing day-to-day expenses, making purchases, and handling cash flow fluctuations.

Application process for a revolving line of credit


Research for the right lender

Conduct thorough research to identify lenders who offer revolving lines of credit. Consider factors such as interest rates, credit limits, repayment terms, and customer reviews to select the lender that best suits your business needs.


Assess your credit needs

Evaluate your business's cash flow requirements, working capital needs, and growth plans. Determine the amount of credit you need and for what purposes. This assessment will help you provide accurate information during the application process.


Submit the application

Fill out the application provided by the chosen lender. Be prepared to provide detailed information about your business, including financial statements, tax returns, bank statements, and any other supporting documents requested by the lender. Ensure that all the information provided is accurate and up-to-date.


Application review

The lender will review your application and assess various factors, such as your credit history, the financial health of your business, creditworthiness, industry risk, and repayment capacity. They will evaluate the information provided and may conduct additional checks, such as a credit check or background verification.


Approval and credit terms

If your application meets the lender's requirements, you will receive approval for the revolving line of credit. The lender will then provide you with information about the credit terms, including the interest rate, repayment terms, any fees or charges, and other relevant terms and conditions.


Accepting the terms

Review the credit terms provided by the lender. If you are satisfied with the terms, you can formally accept the offer. This may involve signing a loan agreement or other documents as required by the lender. Once the terms are accepted, you can begin using the approved credit limit as per your business requirements.

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How does a revolving line of credit work

Credit limit approval

To understand how does a business revolving line of credit work we need to start at the approval step. Once you have applied for your business revolving line of credit the details of your application will be evaluated by the lender.

The lender will then assess your business’s creditworthiness, and determine the approved credit limit based on factors such as your business's financial health and capacity for repayment.

Accessing the funds

Once your credit line is approved, you gain the ability to access the funds whenever necessary. This can be achieved through a variety of methods, including issuing checks, utilizing a dedicated credit card, or engaging in electronic transfers.

You are allowed to withdraw funds up to the approved credit limit, and as you make repayments, the available balance will be replenished accordingly.

Interest and fees

Interest and fees apply to the outstanding balance of your credit line. The lender will charge interest on the amount you borrow, usually based on a predetermined interest rate. Additionally, there may be fees associated with the credit line.

Such fees include annual fee or transaction fees. It is important to review and understand the interest rates and fees associated with your credit line.


Repayment is a crucial aspect of a revolving credit line. You are required to make regular payments towards the outstanding balance.

These payments typically include interest charges and a portion of the principal amount borrowed. The repayment terms and schedule will be outlined in the credit agreement.

Revolving credit

The revolving credit cycle refers to the continuous use and repayment of funds within the approved credit limit. As you make repayments, the available balance increases, allowing you to access funds again.

This flexibility allows you to use the credit line as per your business needs, whether it is for covering expenses, managing cash flow, or seizing growth opportunities.

Credit renewal

When it comes to credit renewal, the terms of a revolving credit line vary depending on the agreement with the lender. Some credit lines have a set term, after which you may need to apply for renewal.

Others may have an open-ended arrangement, allowing you to continue using the credit line. It is important to review the renewal terms and communicate with the lender accordingly.

Advantages of revolving line of credit

Flexibility in borrowing and repaying

A revolving line of credit offers flexibility in borrowing and repaying funds. It allows businesses to access funds as needed, making it suitable for managing fluctuating cash flow.

Borrowers can withdraw funds, repay them, and reuse the credit line again without going through repeated application processes. This flexibility provides businesses with convenient access to capital when required.

Lower interest rates

Revolving lines of credit typically offer more favorable interest rates compared to alternative financing options. As businesses have the ability to repay and reuse the credit line, lenders view it as less risky.

This perception of reduced risk enables lenders to provide competitive interest rates, rendering revolving lines of credit a cost-efficient choice for businesses seeking short-term financing solutions.

Option to improve credit score

Making timely repayments on a revolving line of credit can also contribute to enhancing a business's credit score. Consistently utilizing and repaying the credit line showcases sound financial practices, which can have a positive influence on creditworthiness.

A healthy credit score can result in improved loan terms and increased opportunities for accessing alternative forms of financing in the future.

Simpler eligibility requirements

Revolving lines of credit generally have simpler eligibility requirements compared to traditional loans. While each lender has their criteria, they often focus on factors such as credit history, revenue, and business stability.

This makes it more accessible to small and medium-sized businesses that may not meet the strict requirements of traditional financing.

Check our article on best small business line of credit in Singapore to know in detail some of the best credit line options available in Singapore for SMEs in 2023.

Access to cash flow for business expansion

One of the significant advantages of a business revolving line of credit is its ability to provide access to cash flow for business expansion.

It offers the necessary liquidity for investing in growth opportunities, such as expanding operations, purchasing inventory, or hiring additional staff.

Businesses can tap into the credit line to capitalize on favorable market conditions or overcome temporary financial challenges.

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Disadvantages of revolving line of credit

Risk of default

The risk of default stands as a prominent drawback of revolving lines of credit. In case a borrower is unable to repay the borrowed funds, the lender retains the right to pursue legal measures to recover the debt. As a consequence, the borrower may face supplementary charges, harm to their credit score, and potentially encounter legal ramifications.

Credit utilization

The utilization of revolving lines of credit can have repercussions on a borrower's credit score. If a substantial portion of the available credit limit is utilized, it can harm the credit score.

This high credit utilization indicates increased risk for lenders, resulting in a lower credit score and potentially creating difficulties in obtaining future credit opportunities.

Potential for over-borrowing

Another drawback is the potential for over-borrowing. Revolving lines of credit offer convenient access to funds, which, without exercising proper discipline, can entice borrowers to exceed their repayment capabilities.

This scenario can trigger a cycle of escalating debt and financial instability.

Variable interest rates

In contrast to fixed-rate loans, revolving lines of credit frequently involve variable interest rates. Although this may present lower initial interest rates, it also implies that the rates can vary over time.

Consequently, the borrower may encounter unexpected, increased interest expenses, rendering it difficult to effectively strategize and manage their finances.

Fees and charges

Lenders often impose various fees and charges for maintaining a revolving line of credit. These fees can include annual fees, transaction fees, or even penalties for late payments.

These additional costs can add up, making the overall cost of borrowing higher than anticipated.

If you are looking for other funding options for your startups, check out our article on the best crowdfunding platforms in Singapore. Explore the best platforms, tips for successful campaigns, and funding opportunities for your startups.

How to qualify for a revolving line of credit?

To know how does a business revolving line of credit work you must also be aware of how to qualify for one. Meeting specific eligibility criteria is essential to qualify for a revolving line of credit.

Lenders assess factors such as maintaining a favorable credit score and credit history, exhibiting business stability, and providing evidence of repayment capability.

A reliable credit score demonstrates responsible financial conduct, while a positive credit history reflects a consistent record of timely payments. Business stability signifies dependability and the capacity to repay borrowed funds.

Additional considerations may include income, cash flow, and collateral. Fulfilling these requirements and criteria enhances the chances of obtaining approval for a revolving line of credit.

Where do I apply for a business revolving credit line?

Applying for a business revolving line of credit can be pretty simple, especially with Volopay. All you need to do is submit the required documentation on Volopay and our team will guide you through the rest of the particularly easy application process.

You can get immediate access to credit lines on Volopay with equally flexible repayment options.


What is the difference between revolving credit and loan?

Revolving credit usually provides a predetermined credit limit that can be borrowed and repaid repeatedly. In contrast, a loan is a lump sum of money that is borrowed upfront and then repaid over a set term with fixed monthly payments.

Revolving line of credit vs credit card - What is the difference?

Revolving credit refers to a credit line with a predefined limit that permits multiple borrowings and repayments, often featuring variable interest rates. On the other hand, a credit card functions as a type of revolving credit where users can make purchases within a specified credit limit and fulfill minimum monthly payments.

Is a credit card a revolving line of credit?

Yes, a credit card is a type of revolving line of credit.

How to calculate interest on a revolving line of credit?

To determine the interest on a revolving line of credit, you generally multiply the outstanding balance by the interest rate and the duration for which the interest is computed. The resulting figure represents the accrued interest during that period, which is then added to the outstanding balance for the subsequent calculation cycle.

What is the interest rate on revolving credit?

The interest rate on revolving credit lines typically differs from provider to provider.

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