Imagine having to apply for a new credit card every time you want to buy something. It would get frustrating fast, and you’d probably stop using your credit card for everyday purchases. To avoid this inconvenience, creditors offer revolving credit accounts that let you use the same credit line to keep borrowing money.
Creditors limit their risk by setting a maximum amount you can borrow—your credit limit—and they monitor your account and creditworthiness to determine if they should raise or lower your limit. But once your account is open, you can repeatedly borrow against it without having to reapply.
What is a line of credit?
A line of credit is an account you can borrow money against. It’s important to note that a line of credit is similar to, but different from, a credit card. There are a few key differences between lines of credit and credit cards:
- Repayment periods: Lines of credit often have longer repayment periods than credit cards.
- Interest rates: Lines of credit commonly have lower interest rates compared to credit cards.
- Credit limits: Lines of credit typically have higher credit limits than credit cards.
When you apply for a line of credit, you’ll receive a maximum credit limit that you can draw from, up to that limit.
Shopify Line of Credit: Draw. Repay. Repeat.
Stay focused on growth with a revolving credit line. Draw funds at any time, only pay interest for what you use, and replenish as you go
What is a revolving line of credit?
A revolving line of credit allows someone to borrow by using a credit line with a maximum credit limit. Borrowers can apply for a revolving credit account and, if approved, take out loans against their credit line until their balance reaches their credit limit. Repayment terms can vary, but commonly, borrowers can repay the amount owed all at once and borrow the money again, or they can pay a portion and revolve the remaining balance into the next billing period.
How revolving lines of credit work
A revolving line of credit has a cyclical nature: You draw funds, and then you repay what you’ve borrowed to free-up more credit to borrow against.
How draws and fees work
Borrowing money against your revolving line of credit is known as a draw. How much you can draw is determined by your maximum and available credit limits. For example, let’s say your maximum credit limit is $500,000. You draw $40,000 from that, leaving you $460,000 in available credit to draw against until you repay that $40,000 draw (along with any interest owed).
Depending on how your line of credit is structured, you might pay a fee on the initial account setup, or every time you draw. You might also pay monthly, annual, or inactivity fees.
How repayments work
Repayment terms for lines of credit vary depending on the lender. Many lines of credit treat each draw as an individual term loan, where as soon as you borrow money, you begin to pay it off on a fixed schedule. Then, if you make an additional draw, the loan is re-amortized. Loan re-amortization, also called loan recasting, occurs when a loan’s terms and repayments are adjusted based on a borrower making a larger-scale payment.
Other lines of credit have defined draw and repayment periods, where you can make multiple draws before having to make repayments.
Examples of revolving credit accounts
You can open and use different financial products that will give you access to a revolving line of credit. Common examples include:
Each account will have a credit limit and let you revolve your balance, but they also work differently.
Unsecured business lines of credit
With an unsecured business line of credit, your eligibility, rates, terms, and credit limit can depend on your credit scores and the lender.
Similar to a credit card, you’ll have a maximum credit limit. However, unlike with a credit card, interest accrues on a line of credit as soon as you draw funds. There may also be minimum draw requirements and monthly or annual maintenance fees to keep your account open.
With some credit lines, each loan you take out has its own repayment amount and a fixed repayment period. You can take out additional loans as you pay down your balance and free up available credit.
Other lines of credit have an initial draw period, which is when you can take draws and make minimum or interest-only payments. Your account revolves during the draw period. Once it ends, you can’t take any additional draws, and you make fixed payments during a repayment period.
Secured lines of credit
Secured lines of credit require you to offer the lender collateral to open your account. For example, business owners may use their business’s assets as collateral to secure a business line of credit. Collateral requirements can vary across different lenders and borrowers.
These secured lines of credit can be easier to qualify for and may offer lower interest rates than unsecured credit lines, but you could lose the collateral if you don’t repay your loan. Also, your eligibility and credit limit can depend on the collateral’s value.
Shopify Line of Credit
Shopify Line of Credit is a revolving credit line available through Shopify Lending that, if approved, you can draw from when you need it. With credit limits customized to your business, you can use it to manage everyday expenses, optimize your cash flow, and plan for the unexpected. Once you make a draw, you’ll automatically pay for what you use with fixed monthly payments for six months, with options to pay off early.
Unsecured and secured credit cards
Credit cards are one of the most popular ways to obtain revolving credit. You can use a credit card to make a purchase, balance transfer, or cash advance against your card’s credit limit.
Each month, you have to make a minimum payment to avoid late fees and hurting your credit score, a grade that lenders check to determine if you are likely to pay your bills when they’re due. However, if you pay your balance in full when due, you don’t pay interest on your purchases.
Many credit cards are unsecured credit lines, and you qualify based solely on your creditworthiness, which is measured by various factors, including your income, debts, and credit score. If you have a low credit score, you may want to apply for a secured credit card instead. These work almost identically, but you need to send the card issuer a refundable security deposit to open your account. The deposit helps limit the issuer’s risk and determines your card’s credit limit.
Lines of credit vs. business loans
Business loans are another popular type of credit account often used by larger retail businesses. Examples include the revenue-based term loans available through Shopify Capital or term loans. Loans share some similarities with lines of credit, but there also are big differences.
Receiving the funds
How they’re different: Loans give you the entire loan amount upfront, and you’ll need to apply for a new loan if you want to borrow more money. Revolving lines of credit have a maximum credit limit, but you can choose when and how much you want to borrow.
Interest rates
How they’re similar: Loans generally charge you interest on the amount you borrow. The rate can depend on the type of loan, lender, your creditworthiness, and (in the case of secured loans) your collateral.
How they’re different: You pay interest on the entire loan from the start because the lender gives you the funds right away. With lines of credit, you only pay interest on the amounts you borrow.
Repaying the loan
How they’re similar: You’re required to repay the loan, plus fees and interest. If you fall behind, creditors may charge you an additional fee and report late payments to the credit bureaus—Equifax, Experian, and TransUnion. The late payments may then appear in your credit reports and hurt your credit scores.
How they’re different: A loan gives you a lump sum of money that you repay over a period of time. A line of credit lets you borrow money up to a limit, pay it back, and borrow again. The big difference is how much you choose to borrow, and thus, how much you repay right away.
Using the funds
How they’re similar: You can use either type of account to borrow money. There are also secured and unsecured options for both loans and lines of credit.
How they’re different: Revolving accounts, including secured lines of credit, often don’t require you to use the funds for a specific purchase. That’s true of unsecured term loans as well. However, many secured term loans (e.g., auto loans and mortgages) are only available for a specific type of purchase.
Impact to your credit score
How they’re similar: Both types of accounts can be reported to the credit bureaus and affect your credit scores. Making at least your minimum payments on time can help your credit scores, while late payments can hurt your scores. Having a mix of both types of accounts in your credit report can also be good for your scores.
How they’re different: The current balance relative to the initial loan amount or credit limit is a factor in credit scores, but credit scores tend to give more weight to how you’re using revolving accounts. Your credit utilization ratio (current balance divided by credit limit) can be a major factor in your score, and a lower ratio is better.
A revolving line of credit can be great for covering everyday expenses
Unlike other types of business financing, a revolving line of credit lets you borrow the capital you need, when you need it, without having to apply multiple times. Many growing businesses use them to cover everyday expenses and to smooth out their cash flow.
Shopify Line of Credit: Draw. Pay. Repeat.
Stay focused on growth with a revolving credit line. Draw funds at any time, only pay interest for what you use, and replenish as you go
Revolving credit FAQ
What are the disadvantages of revolving credit?
If you have longer term plans for your financing, revolving credit may not be the right choice. For example, if you want to borrow money to restock a bestselling product and repay it over the next 12 months or longer, you may be better off choosing a loan.That’s because loans tend to have a lower interest rate. Revolving credit is more commonly used for smaller everyday or unexpected expenses.
What are the advantages of revolving credit?
Because you only need to apply for a revolving line of credit once to start borrowing money, they’re great for handling small- and mid-term expenses. Most businesses use lines of credit to smooth out their cash flow and pay for unexpected expenses.
What is an example of a revolving line of credit?
Common examples of revolving lines of credit include unsecured credit cards and secured credit lines.
This article is focused on industry standards and descriptions are not specific to Shopify’s financial suite of products. To understand the features of Shopify’s lending products, please visit shopify.com/lending.
Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital, Line of Credit, and Term Loans, is issued by WebBank in the United States.