Moving towards the digital and cashless era, almost everyone has credit cards in their wallets everywhere they go. Even businesses rely much on online credit loans to improve the speed of the cash flow. There are 2 major types of credits that you should know: revolving and non-revolving credit. However, the question is: which one is better?
What is Revolving Credit?
Revolving credit is a credit agreement that allows customers to pay off in whole or in part credit they can afford in current time. As for the first, customers is given the predetermined balance that allowing customers to use it as much as the credit line value, but not over it. Next, this balance of credit line could up and down, it depends on the customer’s usage.
Customers have options to pay for minimum or full payment at every billing cycle. If the minimum payment is chosen, the balance of the credit line will decrease as much as the remaining amount of the bill, plus interest. But if the customer paid for full payment, the balance will return to a full credit line amount. The two kinds of revolving credit are lines of credit and credit cards.
Psst, watch the short video below to know how you can pay your suppliers with Aspire business line of credit:
Revolving Credit: How it Works?
Let’s take a credit card for example. Rani has a gold credit card, whose credit line value is $1,250 with renewable billing cycle every beginning of the month.
- This month, Rani spent $100 for make-up, $50 for new clothes and $50 for dinner at her favorite restaurant. Total spending this month is $200.
- With this amount, the credit line balance has been reduced to $1,250 – $200 = $1,050. At the end of the billing cycle, Rani has two options: to pay it in minimum payment or pay it in full payment.
- If Rani decided to pay it in minimum payment let’s say $10, the remaining credit balance to be $200-$10=$190. The total balance with interest 3% is $195,70. So, the remaining credit line balance for the next billing cycle is $1,250 – $195,70 = $1,054.30.
- If Rani decided to pay it in full payment, the credit line balance at the new billing cycle back to the full amount $1,250.
What is Non-Revolving Credit?
Non-revolving credit is a credit agreement who once repaid, cannot be used anymore. Some types of bank loans applying non-revolving credit scheme are:
- Working Capital Credit. It is a type of credit whose purpose is used as working capital or business activities, both to start a business or expand a business. For example, working capital such as improving the ability of factory production by buying raw materials, paying employee salaries, paying rent of machinery, etc. Learn more about Working Capital here.
- Investment Credit. This is a type of credit used for investing activities. This type of credit is related to a relatively long period of time, both in terms of profitability and return. An example of the use of this type of credit is for investment in oil palm or rubber plantations which generally require a long time to wait for harvest time.
- Consumptive Credit. Compared to the other two types of credit, this credit has an opposite function. As the name implies, this type of credit is used for consumptive purposes or is used to meet personal needs, such as for ownership of a residence or private vehicle. For consumption needs, it can apply both revolving and non-revolving schemes.
Non-Revolving Credit: How it Works?
Non-revolving credit features short and long term credit. Withdrawal and repayment can be done at once or in stages according to the agreement, while early payments will be subject to penalty. Funds that have been repaid cannot be withdrawn by the debtor. So that the credit balance will continue to decline.
For example, for her fashion business, Rani gets a working capital loan from a bank with an outstanding amount of $1,000 and an interest of 2% per year for 6 months. So the installment that Rani must pay every month is $200. If Rani decides to pay the loan early, Rani has to pay for the penalty according to the agreement.
Revolving and Non-Revolving Credit: Which One is Better?
Maybe you still can’t decide which type of credit suits your business needs. Will a revolving credit solve your problem? Will a non-revolving credit fit your financial abilities? Here we have provided a comparison of these two types of credit:
Benefits of Revolving Credit:
- More flexible for everyday use
- There is an option to pay in minimum payment
- Very suitable for short-term needs
Downside of Revolving Credit:
- Interest rate is higher than non-revolving credit
- The credit line has less amount value than non-revolving credit
Benefits of Non-Revolving Credit:
- Has lower interest
- The credit line amount can be adjusted to our income
- Purchasing power is greater because loan value is greater than revolving credit
- Regular payment schedule
Downside of Non-Revolving Credit:
- Not flexible for everyday use
- Applying for a loan tends to be more complicated
- Penalties apply if paid off early
So, revolving and non-revolving credit, which one will be better for your business? This can be adjusted to your abilities and needs. One thing for sure that whether you choose revolving or non-revolving credit, you have to pay the installments on time to protect your credit score.
At Aspire, we envision a world where business owners have fast and simple access to the funding they need to grow. That’s why we’re on a mission to re-invent banking for SMEs across SouthEast Asia. Our current product provides SME and startup owners in Singapore with financial flexibility though a line of credit of up to S$150k, which can also be used to make business payments to enjoy 60 days free credit terms. With no monthly fees or obligations to withdraw, you only pay interest on the amount you end up using. Opening an account is free and can be done online here.