A revolving loan is a flexible line of credit that allows businesses to borrow, repay, and borrow again up to a specified credit limit. It provides ongoing access to funds, making it ideal for managing cash flow, covering short-term expenses, or addressing unexpected financial needs. Unlike a term loan, which has fixed repayment schedules, a revolving loan offers flexibility in repayment as long as the borrower stays within the credit limit.
How does a revolving loan work?
A revolving loan operates like a credit card. The borrower is approved for a maximum credit limit and can draw funds as needed. Once the borrowed amount is repaid, the credit becomes available again for future use. Interest is typically charged only on the amount borrowed, not the entire credit limit, making it a cost-efficient option for managing short-term needs.
Why are revolving loans important for startups?
Revolving loans are crucial for startups as they provide quick and flexible access to funds, helping manage cash flow during periods of uncertainty or growth. They are particularly useful for covering operational expenses, bridging revenue gaps, or seizing unexpected opportunities without committing to long-term debt.
What’s the difference between a revolving loan and a term loan?
A revolving loan allows borrowers to access and repay funds repeatedly up to a set credit limit, offering flexibility. In contrast, a term loan provides a lump sum that must be repaid in fixed installments over a specified period. Revolving loans are better suited for ongoing financial needs, while term loans are ideal for one-time investments or large purchases.
What are the risks of revolving loans for startups?
The primary risk of a revolving loan is the potential for over-borrowing, leading to difficulty in repayment and high interest costs. Additionally, if the startup consistently maxes out the credit limit without generating sufficient revenue, it may face financial strain. Proper financial management and disciplined borrowing are essential to mitigate these risks.
Or want to know more about pre-seed funding?
