Should I apply for revolving or non-revolving credit as a business owner?

With 39% of SMEs seeking finance of £25,000 and up in 2023 and SME credit searches up by 23% in 2024 when compared to the same quarter in 2023, it’s fair to say now is as good a time as any to get to grips with which credit options are available to British businesses.

The two different types of credit options we’ll be exploring here are revolving vs non-revolving credit. We’ll delve into what they are, what the difference is, and we’ll provide some insights into how you can choose the most suitable one for your business.

What is the difference between revolving and non-revolving credit?

The difference between revolving and non-revolving credit is that the first allows you to borrow repeatedly whereas the latter is a one time funding amount that is usually repaid over a set period in instalments. Most people are familiar with two prime examples of these two funding types – business credit cards as an example of revolving credit and a commercial mortgage as an example of non-revolving credit.

What is revolving credit?

Revolving credit is a type of finance where a lender extends a credit line up to a specific amount to a borrower. That amount can be utilised then replenished on a recurring basis. Interest is usually charged on any debt that is not paid within the month. Cards aren’t the only form of revolving credit. For businesses, revolving credit facilities can extend funds in the form of cash, cheques, and even direct transfers to a bank account – this enables businesses to pay suppliers, meet rent obligations, and run payroll without being tied to a card specific payment method.

Benefits of revolving credit

• Manage cash flow: Fluctuating seasonal needs and emergency costs can be balanced with a revolving credit facility.

• Interest rates: Interest is usually charged on what is not paid at the end of the month which means if you repay your revolving credit every single month in a timely manner, you may get to experience reduced interest rates when compared to other forms of credit.

• Flexible credit: With the revolving nature of this credit type, you can use (or not use) it as needed month to month.

• Build your credit score: Consistent repayment of a credit line and low utilisation can have a positive impact on your personal or business credit score, potentially helping you transform bad credit when you need a business loan. 

• Points and benefits: Some revolving credit funding solutions (like credit cards) offer rewards and points which can be used to purchase dinners, stock, and even airline tickets.

Revolving credit drawbacks

• Interest rates: This one may be a positive feature if repayment is made in a timely fashion, but if payment is delayed beyond the grace period, interest rates can be significantly higher than those offered with non-revolving credit.

• Impulsive habits: Revolving credit can create a habit of overspending. Since the funds are there, ready for the taking, it can be easier to reach for them during times where they might not necessarily be needed. This is particularly true for anyone already struggling with impulsivity.

• Credit score: While a credit score can be impacted positively by this form of credit, it can also have a negative effect. If payments are missed or a default occurs, the impact to your credit score can be severe, which can impact your ability to borrow in the future.

What is non-revolving credit?

Non-revolving credit is a stand-alone agreement between a lender and a borrower. The lender extends a specific amount to the borrower once and the borrower repays that money either over a fixed period with regular (usually monthly or quarterly) instalments, or in some instances, the borrower may pay interest-only over a fixed period and then repay the entire loan at the end of the term. A bridging loan used to fund a construction project is an example of this latter form.

Non-revolving credit benefits

• More control: Needing to re-apply to gain more funding provides borrowers with more control over their spending as it can provide that additional time to carefully consider if this is credit they really want to utilise.

• Predictability: Payments are usually agreed between the borrower and the lender in advance, so you’ll know exactly how much you need to pay each month and will be able to budget for the cost.

• Increased funding: Borrowers can often gain more funding since the amount is extended over a longer period of time. This is particularly true if the funding is secured, for example, a mortgage is secured since it uses a property as collateral for the loan. Some revolving credit options can also be secured but it’s more common with non-revolving credit.

• Credit score: Like revolving credit, non-revolving credit can improve your credit score by building up a credit history if repayments are made on time.  

Drawbacks of non-revolving credit

• Less flexibility: To borrow further funds you will usually need to enter into a new agreement.

• More paperwork: Entering into new agreements each time you need further funding may bring more legwork and an increased amount of paperwork.

• One-time use: Non-revolving credit is meant to be used once and then repaid over a specific period, which makes it unsuitable if you’re looking for monthly access to additional funds.

Revolving vs non-revolving credit examples

Examples of revolving credit include:

• Business credit cards: This one’s simple – with a business credit card, you use the card up to the agreed limit, repay, then reuse.

• Business lines of credit: Similar to a credit card but without the physical card and the funds can be extended as cash, cheques, or bank transfers.

• Invoice finance: Invoice finance extends up to 90% of the value of your unpaid invoices to you directly and you repay those funds once your client pays the invoice. This form of funding can be revolving depending on the agreement you have with the lender.

• Home equity lines of credit: A form of revolving credit that uses the equity in a property as security for the funds.

• Secured revolving credit: Revolving credit with an asset used as collateral. Secured funding could be secured with a savings account, investments, or any assets belonging to the business.

• Unsecured revolving credit: The most popular type of revolving credit – where there is no collateral. Gaining access to unsecured funding is usually based on your credit score, business performance, and cash flow forecasts.

Some examples of non-revolving credit are:

• Asset finance: Commercial vehicle leasing, equipment finance, and other forms of asset finance are examples of non-revolving credit, in which you purchase or borrow an asset and pay for its use or ownership in instalments.

• Commercial mortgage: A commercial mortgage is where a borrower buys a property and pays over an extended period, usually around 15-30 years. 

👉 Find out how much of a deposit you need for a commercial mortgage.

• Business loan: A business loan is a certain amount of money extended to a business and repaid over time, start ups can also get business loans but there are usually slightly different terms for them, for example, the owner may need to put up a personal guarantee to get a start up loan.

• Bridging loan: A bridging loan is used to purchase something substantial, usually a property, and then interest is paid over the term (usually between a few months to a year) and the full sum is repaid at the end of the term. This is usually used to bridge the gap between funding.  

👉Find out how a bridging loan affects future mortgage applications. 

Which one is right for my business?

That depends a lot on your financial goals.

Do you need access to a specific amount of funding to cover an emergency fee, purchase new equipment, or buy a new property? Would you like to repay that funding slowly over an extended period, or in full in around a year? If so, then non-revolving credit may suit you.

Apply for non-revolving credit

Or, are you seeking a reusable line of credit that you can draw from and repay on a monthly basis for an undefined length of time? Do you want to be able to adjust your finance utilisation depending on what’s going on at the business in a given month? If that sounds more like what you need, revolving credit might be more suitable.

Apply for revolving credit

Apply for credit with Funding Options by Tide

We help business owners find suitable funding solutions to help grow and manage their businesses. Fill in the information in the form linked below and if you’re eligible, we’ll match you to our network of over 120 lenders offering between £1000 and £20M.

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.