Cash is the lifeblood of any organization. Every business owner knows this. Cash is necessary to meet immediate expenses, such as rent, suppliers, and payroll, and it’s vital for day-to-day survival. It keeps the doors open and daily operations moving. Aside from this, cash also allows a business to take advantage of new investment opportunities. More importantly, having cash reserves can help a business survive economic slumps. 

Ideally, a business should maintain cash reserves equivalent to 3 to 6 months of operating expenses. This serves as a buffer for client delays, unexpected downturns, or emergencies. It’s an assurance that unexpected events don’t disrupt normal business operations.

However, the reality is that the cash flow of a business doesn’t always align with its needs. Sometimes, when it’s time to pay salaries, purchase inventory, or buy equipment, the cash just isn’t there. In this case, instead of dipping into personal savings, business owners can fall back on business credit.

If you have a personal credit score, businesses also have their own financial reputation. This is its business credit, a financial profile and score that evaluates a company’s creditworthiness. However, instead of being tied to an individual’s Social Security Number, business credit is tied to your company’s legal identity, such as its Employer Identification Number. In the same way that a personal credit score measures how likely you are to pay back borrowed money on time, business credit measures how reliably your business manages debts and pays vendors.   

Revolving Credit

Revolving credit is a type of credit account that provides an on-demand financial safety net for your business. This flexible financing arrangement allows a business to borrow money repeatedly up to a set limit. Payments reduce the balance owed and frees up credit, which can be used again. 

How Revolving Credit Works

The lender gives the business a credit limit, which it can draw from whenever it needs funds for whatever purpose. The lender only charges interest on the amount that the business draws. This amount can be less than its maximum credit limit but not more. As the business makes payments, the principal is credited back and becomes available to use again. 

The Limit	The lender sets a maximum credit limit.
The Draw	The business can draw and spend funds whenever needed.
The Repayment	As the business pays back what it has borrowed, that credit becomes available to use again.
The Interest	Interest is only charged on the exact amount the business draws, not the entire limit.

A business only needs to apply for a revolving credit account once. That is, there’s no need to apply for a new loan every time. As long as the account remains in good standing, the revolving credit stays open as a credit source or flexible borrowing tool. 

Businesses can use revolving credit for emergency expenses like sudden inventory needs or unexpected repairs, seasonal fluctuations so operations continue during slower months, and to bridge the gap or manage the delay between receiving payments from clients and paying suppliers.  

Examples of Revolving Credit 

The two most common examples of revolving credit are business credit cards and business lines of credit. 

• Business Credit Card

A business credit card is a line of credit issued by major financial institutions to a company. Business owners typically use the card as a tool for increasing business credit and to separate business expenses. Just like a personal credit card, business credit cards also allow a business to earn rewards tailored on its spending.  

• Business Line of Credit

A business line of credit provides businesses access to much-needed cash. Businesses can control when they withdraw money and how much, so it is more flexible and affordable than a business loan. 

However, similar to loans, a business line of credit can be either secured or unsecured. The former involves a collateral (such as inventory, equipment, or property) as a security deposit, while the latter doesn’t require one.

“A line of credit can be extremely helpful for a business with strong revenue that simply needs a little extra cash from time to time,” the U.S. Chamber of Commerce notes.   

• Installment Credit

Installment credit is a one-time loan or commercial financing, where the business receives a lump sum of cash up front. The business then pays back the loan, with interest, in fixed and scheduled payments (installments) over a set period of time. The account is closed once the loan is paid off. 

Key Characteristics of Installment Credit

Common types of installment credit include term loans, SBA loans, and equipment financing, which all share the following key characteristics: 

Structure	Principal and interest are amortized over the life of the loan
Fixed Payments	Amounts are typically due on a monthly or weekly basis, which is good for predictable budgeting
Interest Rates	Can be fixed or variable and depends on the lender and borrower’s credit profile

Common Uses of Installment Credit

Businesses often use installment credit to finance big-ticket growth goals. These include acquisitions (buying or merging with another business), commercial mortgages (buying or refinancing real estate), equipment financing (purchasing heavy machinery, etc. which itself becomes collateral for the loan), and working capital (to cover expansion, a large inventory purchase, or payroll). 

Trade Credit

Trade credit is a “buy now, pay later” agreement between a business and its suppliers. The supplier allows the business to buy inventory, raw materials, and other goods today and pay the invoice in 30, 60, or 90 days. In short, trade credit is a short-term, interest-free loan from a business’ suppliers. 

How Trade Credit Works

After a purchase is made, the vendor issues an invoice to the business. The invoice details the specific terms (net terms) dictating when the payment for the goods is due. The standard repayment periods are typically 30, 60, or 90 days. Businesses get a small discount for rapid repayments. 

Types of Trade Credit

Open Account	The seller ships the goods and sends an invoice, trusting the business to pay on time. This is the most common type of trade credit.
Promissory Note	This is a formal written contract where the business promises to pay by a specific date. It can include interest if payments are late.
Trade Acceptance	Also known as bills of exchange, this is a legally binding document used extensively in international shipping. Both parties sign off on the exact payment date.