A revolving line of credit is an agreement in which your bank makes a certain amount of credit available to you. Think of it like a credit card. You have a credit limit, and you can use as much or as little as you need. When you make a payment, that amount of credit becomes available for you to use again, that’s why it’s called “revolving” credit.
Using your revolving credit is easy and flexible. When your business needs cash, you can use the credit to transfer money into your bank account. Then, you can withdraw it as cash or use it for online payments and transfers.
Say you have a revolving line of credit up to INR 1,00,000. Your computer breaks, so you use INR 10,000 of your credit to pay for repairs. There’s still INR 90,000 of credit left for you to use. As time goes by, the bank charges interest on the INR 10,000 you borrowed. If you make a payment of INR 1000 plus interest, you now have INR 91,000 of available credit.
For small businesses, a revolving line of credit can be a big help. If your customers are late on payments, you don’t have to worry about falling behind on your bills. The credit can help you bridge the gap. It can also cover unexpected expenses quickly and avoid expensive delays in production. If a machine breaks, you can use the credit to get it back up and running quickly so orders go out on time.
In comparison to traditional loans, a revolving line of credit has some important advantages. The payments are flexible. If you have a tough month, you can pay just the minimum, something that’s not possible with most loans. Plus, since you only pay interest on the credit you use, you can reduce costs. If you never need the credit, you never have to pay interest.
Cash shortages are normal for small businesses. A revolving line of credit acts as a financial security net so it’s easier to manage your cash flow without damaging your finances.