What is a ‘Revolving Credit’
Revolving credit is a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes and can fluctuate each month depending on the customer’s current cash flow needs. Revolving lines of credit can be taken out by corporations or individuals.
BREAKING DOWN ‘Revolving Credit’
The bank in agreement with the customer guarantees a maximum amount to be loaned. Along with the commitment fee, there are also interest expenses for corporate borrowers and carry forward charges for consumer accounts.
Financial institutions consider several factors regarding the borrower’s ability to pay before revolving credit is issued. For an individual, this consists of credit score, current income and employment stability. For organizations seeking revolving credit, a financial institution reviews the company’s balance statement, income statement and statement of cash flows.
Revolving credit is useful for individuals or entities that experience sharp fluctuations in cash balances or unexpected expenses. Because of the convenience and flexibility, a higher interest rate is typically charged on revolving credit as opposed to traditional installment loans. Revolving credit typically comes with variable interest rates that may be adjusted.
Examples of Revolving Credit
The credit limit is the maximum amount of credit a financial institution is willing to extend. The most common revolving credit examples include home equity lines of credit and personal lines of credit.
Revolving Credit vs. Installment Loan
Revolving credit differs from an installment loan, as the installment loan has a fixed number of payments over a set period of time. Revolving funds only require payment of interest plus any applicable fees.
Revolving credit implies a business or individual is pre-approved for a loan. A new loan application and credit reevaluation does not need to be completed upon utilizing revolving credit. For this reason, revolving credit is intended for shorter, smaller loans. For larger loans, financial institutions require more structure including installation payments.
Revolving Credit vs. Credit Cards
There are numerous differences between a revolving line of credit and a business credit card. First, there is no physical card required for revolving credit. Second, revolving credit does not require a specific purchase. Revolving credit allows money to be transferred into a bank account for any reason. The actual transaction does not need to have been made yet. This makes revolving credit similar to a cash advance as funds are available up front. Revolving credit also typically has significantly lower interest rates compared to credit cards.