Revolving credit and non-revolving credit are used for very different reasons in very different situations and circumstances.
With different interest rates, limit amounts, and terms and conditions, it’s important to understand both lines of credit to determine which one would be most suitable for you.
On our website, directroute.co.uk, you will find a vast amount of information related to credit, collections, and services that our team can help you with at any stage of your business’s life cycle.
In this post, we examine the differences between these two types of credit and the pros and cons of each.
Revolving credit vs. non-revolving credit
Revolving credit
Revolving credit, also known as open-ended credit, is a form of credit where you can borrow money on an ongoing basis. Things such as credit cards or business lines or credit are examples of this, where you can purchase/access goods and services up to the credit limit on your account. It is a credit source that ultimately can be used again and again.
You then pay back the money borrowed monthly, reinstating your credit limit as you go. For example, if you have a £5,000 credit limit and you buy goods to the value of £1,000, you still have a credit limit of £4,000. If you choose to pay £500 back one month, your credit limit will go back to £4,500, and so on, until the total amount is paid back.
Note: If you clear your outstanding balance in full, you may not have to pay interest.
Revolving credit means you can access this form of credit whenever you want/need it, and it can be both secured or unsecured, depending on the terms you sign up for.
However, it is important to note that your credit score will be affected depending on how you use the credit and how you pay back any outstanding amounts.
Taking out a form of revolving credit, such as a credit card, can be a good way to build up good credit. However, missing payments can negatively impact your credit score.
That’s why, as part of our debt collection services, we always advise businesses to make payments on time (especially minimum repayments) to avoid late payment charges and additional interest fees.
Advantages of revolving credit
- More flexible
- It can be used for a variety of purchases
- Credit sum can change due to various factors
- The borrowing period is ongoing so long as payments are being made
- Suitable for smaller, day-to-day purchases
- There is no set repayment schedule
- You always have access to funds
- You have a greater level of control
Non-revolving credit
Non-revolving credit is a debt that you pay back in one instalment; unlike revolving debt, you can’t continually add to the original loan amount you have agreed, and you will experience stricter credit policies, as well as penalties for defaulting on the payment schedule.
These penalties often fall into small business debt collection, where professional agencies, such as Direct Route, are contacted to help collect on any outstanding payments.
In addition, once you have cleared your non-revolving debt, which is it, your account is cleared, and you would have to apply for another line of credit if this were required.
With non-revolving credit, you will agree on a fixed interest rate and repayment schedule over a set time period.
Advantages of non-revolving credit
- One of the biggest advantages of opting for a non-revolving line of credit is that interest rates tend to be lower.
- You know the set amount you will pay each month, which can help you considerably with budgeting.
- Suitable for large purchases.
- There is a clearly defined end date for making repayments.
- Interest is added to each repayment, so there are no hidden surprises.
- Lower risk.
- Suitable for a single purpose.
Small business debt recovery
Businesses need revolving and non-revolving credit for numerous reasons, and it’s important to weigh the pros and cons of each to find the line of funding that is right for them.
Whichever option you choose, credit checks will be carried out to check your eligibility to repay.
Revolving credit is most suitable for those who need credit quickly. For everyday transactions and help with building a strong credit rating.
Whereas non-revolving credit is most suitable for big projects and large purchases.
At Direct Route, we help small to medium businesses with all of their credit control processes and procedures, including collecting outstanding repayments and invoices.
Working as an extension of your team, we help alleviate the pressure of chasing outstanding monies, giving you back valuable resources and time.
To find out more and to see how we can help you today, call us at 01274223190 or alternatively, drop us an email at memberbenefits@directroute.co.uk and a member of our team will be happy to help.