Revolving Line Of Credit

A revolving line of credit is different from other types of loans that have a start date, a payment interval and eventually a finish date, when the loan is fully paid up. With a revolving line of credit, the lender makes a commitment to make a certain amount of money available to the borrower, who can be an individual or a company. The lender will decide the amount that is available to the borrower and this line of credit can be used with a credit card or a line of credit available from your bank account. Each time a payment is made the balance of credit is reduced. Payments can continue to be made until the ceiling of the revolving line of credit is reached.

Revolving lines of credit for credit cards
Anyone who has, or has had, a credit card will know exactly how the revolving line of credit works. There are essentially two repayment methods. In the first case the issuer will look to take back the completely used amount for payments charged to the credit card at the end of the month or on a particular date the month. Having taken this payment, the revolving line of credit will be re-established. The second method is that the credit card company will take a minimum amount from the credit card holder, leaving the cardholder with the opportunity to pay up the rest. In most cases no interest will be paid on payments completed within the month of use. However, if debts remain on the credit card, interest will need to be paid at the Annual Percentage Rate. The APR on credit cards is high and can be as much as 15% to 25%, so it is good practice to clear down debts on credit cards as soon as possible.

Revolving line of credit for staff
Business trips can be costly and if your staff needs to travel in connection with their job, giving them access to a credit card can ensure they have no out of pocket expenses. Sometimes companies acquire credit cards for their staff and give the staff member the credit card to use for company business expenses, such as travel tickets, hotel accommodation, subsistence and entertaining. Alternatively, an employee can use his or her own credit card and submit an expense claim, normally monthly, using the resulting payment to reload their revolving line of credit.

Who makes money out of a revolving line of credit?
Generally speaking, the lender will always make a profit out of a revolving line of credit. However, individuals can make a profit if the purchase they make is for an item that will assist with their work and allow them to earn more. Companies can also use a revolving line of credit in order to be able to buy products and services that are then sold with a profit margin that will directly affect the profitability of the company. Over a period of time, a well-run business will have less need for a revolving line of credit and will not need to use the facility so often.

How does a revolving line of credit work for companies?
Very often a newly established company has the highest need for a revolving line of credit compared with more established companies. The way to approach this requirement, if you are a business owner or director of a newly established company, is to arrange to discuss this facility with your bank. Your suppliers, who have no track record with your company, may be reluctant to offer you credit facilities. On the other hand, your customers expect to be able to buy on credit, normally 30 days from invoice date and this can leave you wondering what you can do.

Sometimes, you can sell your invoices to your bank. This is known as known as sales ledger factoring. First of all, the bank decides the ceiling of the revolving line of credit your company can qualify for. This calculation is based on your average monthly sales and the average customer payment intervals. For example, if your average payment date from customers is 30 days and you expect to invoice $30,000 per month, you could qualify for a $30,000 revolving line of credit. When you issue a customer with an invoice, you take a copy of the invoice to the bank together with a form that gives the bank details of the customer’s bank account. The amount is then credited to your account and available for your use.