A revolving line of credit (RCL) is an agreement by a lending institution to lend up to a specific amount of capital, and after it has been repaid, allow a company to borrow more. This is a common form of financing that requires no collateral to gain approval, unless the applicant’s credit history does not pass certain requirements.
As such, a revolving line of credit is suitable for temporary needs, such as to deal with seasonal or other cyclic fluctuations, that can be quickly paid back, giving the borrower the flexibility of a credit card, and similar variable market-based interest rates. This type of loan is not particularly appropriate for larger, long-term uses such as equipment, real estate, buildings, etc.
The size of this line of credit is dependent on the business’ past revenues and future cash flow estimates, however an RCL is not necessarily a cure-all for small businesses, especially. Normally, a business must show profit and the ability to repay the debt with regular monthly installments. In order if determine if a business would qualify for a specific revolving line of credit at a lending institution, the daily balances and transactions of business bank accounts may be examined.
A revolving line of credit’s main advantage over a regular loan is that interest is only paid on that part of the line of credit that has been used. Some lines of credit also feature the option of interest-only monthly payments, keeping payments low for the initial stages of a developing business.
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