Revolving credit and business loans are both types of debt financing that help businesses fund operating costs and make investments, but choosing the right one depends on the company’s situation and financing needs. Choosing the right one starts by knowing what each is and how the fees get applied.
Revolving credit is where lenders approve a maximum amount a business can borrow that refills with each payment and charges interest only on the outstanding balance.
Business loans are where a company borrows money from a lender for a predetermined amount of money and time, then makes regular payments on a fixed schedule until the loan is paid back.
Revolving credit is better for smaller purchases that companies can pay off quickly and for last-minute needs where there’s no time to get approved for a business loan. It makes more sense than a business loan for:
- Monthly license fees
- Last-minute travel
- Spare parts for equipment
- Supplies and consumables
- New or replacement office equipment
Business loans are better for large purchases that need to be spread out over time, and for non-recurring expenses and investments when you have the time to plan, budget, and go through the approval process. Examples include:
- Purchasing trucks and warehouse equipment
- Developing real estate
- Capital improvements like a new roof, parking lots, or interior renovation
- Buying a full stock of inventory
- Covering payroll for an entire team
It’s simple to choose the right one based on your needs when you know they’re similar, different, and which is best for different scenarios. Here’s some more information on both types of debt financing, then when one makes more sense than the other.
Revolving Credit
Revolving credit is debt financing where lenders approve you for a maximum amount you can borrow at will and you pay interest only on the balance you have outstanding. Types of revolving credit include:
- Business credit cards
- Lines of credit
- Special financing arrangements, like interest-only loans
In addition to having to pay back the balance you borrow, revolving credit can include annual fees, interest fees on your balance, and draw or usage fees you pay each time you access funds.
Missing or being late on payments will hurt your business credit score, but making on-time payments regularly and consistently over time may help build your score, which helps you get lower interest rates on financing products. When you have a history of on-time payments and a strong business credit score, it makes approvals faster and easier on future loans or revolving accounts.
This is why some credit builders and business coaches recommend getting, using, and paying off revolving credit accounts when you first start a business and cannot qualify for larger types of financing like a small business loan.
Business Loans
Business loans are where a company borrows a set amount of money from a lender for a predetermined amount of time and makes regular payments on a fixed schedule until the loan is paid back. Business loans sometimes include only principal plus interest when you pay all the fees up front, and sometimes a lender will include all their fees in the amount borrowed.
There are two main types of business loans depending on what you need to finance, including:
- Short-term business loans where you borrow the money for six months to three years, during which you’ll make the money back and be able to clear the debt faster. The amounts are smaller and they are typically used for operating needs like payroll, inventory, rent, or emergencies. These loans have higher interest rates since they’re paid back more quickly, and also have faster approval times than long-term loans.
- Long-term or commercial business loans are for larger purchases and normally get paid back over longer timeframes — up to 10 and sometimes 25 years. They’re better for purchases and investments when the ROI will take a while to earn back. This can include building an office complex or investing in a fleet of trucks and warehouses where you need time to build up to capacity. The longer length lowers the total monthly payments, making it easier to afford the loan plus interest.
Like with revolving credit, business loans hurt your business credit score if you miss payments but may boost your business credit score as you pay them off. Most of these types of loans require collateral, meaning they’re secured, to get approved, so defaulting on the loan means the lender can seize and sell whatever you pledged for collateral.
Similarities and Differences
These two types of debt financing are similar, which is why some business owners get stuck knowing when to use which. If equipment is needed for a project that you don’t have, revolving credit can make sense to rent it if the need is short-term, and a business loan if you’ll want to purchase or lease it long term, as you’ll be able to use it to keep profits up.
Here’s a quick table with the similarities and differences of revolving credit and business loans along with the types of expenses each is good and bad for.
| Revolving Credit | Business Loans | |
| The amount you can borrow in the future replenishes as you pay down the balance | Yes | No. You must reapply for another loan. |
| Best for | Smaller purchases, supplies and time-sensitive inventory purchases, office equipment, travel, entertainment | Large expenses like vehicles, heavy equipment, acquisitions, real estate, major investments, and capital improvements |
| Amount borrowed | Smaller — up to $200,000 and $500,000 depending on business size. | Larger — with small business loans capping at $5,000,000 for SBA loans, and there is no limit on commercial business loans. |
| Term | Short-term usage (carrying a balance long term costs a lot in interest fees) | Both short-term and long-term |
| Interest payments | Higher than most business loans but only paid on your balance. | Lower than most revolving accounts and calculated in total up front, then built into your monthly payments. |
| Possible fees | Annual fees, origination fees, draw or use fees, overdraft fees, late payment fees | Origination, application, early payoff, late payment, and processing fees |
| Payments | Usually monthly with a minimum amount up to total balance | Usually monthly but can be weekly or daily, and have fixed payment amounts for each payment |
When to Use Revolving Credit or Business Loans
Choosing between revolving credit and business loans comes down to what you need, how much you need, how long you need the money for, and the time you have available. Revolving credit is faster, but interest rates are higher and the total amount you can spend is often less than what’s available with business loans.
Business loans require more time to get approved and you often need collateral to secure the loan (unless the collateral is built in, like with equipment financing), but you can make larger purchases over longer time periods. Here are a few situations for when to choose one or the other.
Recurring Monthly Expenses
Revolving credit is normally best for recurring monthly expenses like rent, utilities, advertising, subscriptions, or business services. This is because you can set it up one time and don’t have to reapply each time like with business loans. An added bonus to using revolving credit over a business loan is that as you pay off the revolving balance each month, you won’t have any interest expense like you would with loan payments. Plus, you can get rewards like cash back and travel points when using some business credit cards.
When you have an upcoming expense that has set time boundaries and known gaps in cash flow, like stocking up on inventory after a slow season, business loans are the better option. You have time to apply for new loans each season or year and will likely get a lower interest rate than on revolving accounts, so you’ll keep more of your sales as profit. The financing can also be used to cover hiring and training staff as well as prepping the store for the season.
The exception to this can be a line of credit where you sometimes find interest rates comparable to business loans. Just check the draw fee with lines of credit to make sure it’s right for your situation, and check whether the rate is variable, meaning it changes based on market conditions.
Vehicles, Machinery, and Equipment
Large purchases of vehicles, machines, or heavy equipment are best made with business loans so you can budget for the monthly payments across a longer time period while the purchase begins making you money. Using revolving credit for these purchases might be doable for some companies when you have a high limit, but unless you pay off the purchase quickly, you’ll pay more in interest fees, causing a potential revenue loss.
If you just need maintenance or repairs for your equipment, then revolving credit is likely your best bet since it’s immediately available and you don’t suffer lost sales from downtime. The fees on a business loan would also make it not worth your while for these smaller types of financing needs, as paying the balance back results in no interest fees — or minimal fees if you can do it in a couple of months.
If you’re worried about major expenses like replacing engines on two semi-trucks, then using revolving credit for an insurance policy is a better option than risking it in hopes of getting a business loan.
Using both revolving credit and a business loan together can also make sense. Revolving credit is a good option for a down payment on a heavy tractor while using a business loan for the remaining payments over time.
Growth and Acquisitions
Growing your company organically or by acquisition requires a mix of both revolving credit and business loans to increase production, add new locations, fund prototypes of new products, entertain potential clients, buy new facilities, or purchase another business entirely.
Business loans will work better for the one-time (or infrequent) purchases you plan for, like buying a competitor, purchasing real estate, or stocking inventory in a new location, because you’re able to plan ahead for both time and collateral, and you can budget for monthly payments over the long term.
Revolving credit will be better for ongoing expenses and for smaller unexpected costs that pop up, like:
- Travel and entertainment
- Utilities and subscriptions
- Seasonal labor
- Last-minute replenishment for stockouts
- Maintenance and repairs
Payroll is another area where both revolving credit and business loans can work together. When you need on-demand workers at the last minute or need to get some temps from an agency on short notice, revolving credit is better than a business loan because you don’t have to wait for an approval and the costs are low enough that the higher interest rates on revolving balances won’t kill your profit.
Small business loans are better for larger payroll needs like a cash crunch to cover the entire staff’s monthly compensation when customers haven’t paid their invoices on time. Online lenders can get an approval done as quickly as 24 hours, giving you the capital to keep staff paid and working. You’ll also be able to budget for it either from a percentage of sales or by cutting other costs in your business.
Growing and running your business day to day requires a mix of both revolving credit and business loans across your short-term and long-term expenses. Revolving credit is better when you’ll pay off the balance quickly or need funds last minute, and business loans are better for large purchases that you’ll need to pay off across longer periods of time.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
