For small and medium-sized enterprises (SMEs) in Singapore, managing cash flow and maintaining liquidity are critical to success. One financial tool that can help achieve this is revolving credit.
This blog post will explain what revolving credit is, how it works, and its benefits and drawbacks for SMEs. By the end, you’ll have a clear understanding of whether revolving credit is a suitable option for your business.
Revolving credit is a type of credit facility that allows businesses to borrow, repay, and borrow again up to a certain limit, as long as the account is in good standing. Unlike a term loan, which provides a lump sum that must be repaid over a fixed period, revolving credit offers flexibility in managing cash flow and funding short-term operational needs.
A revolving credit facility typically works as follows:
1. Credit Limit: The lender sets a maximum amount that the business can borrow at any time, known as the credit limit.
2. Drawdown: The business can draw funds up to the credit limit as needed.
3. Repayment: The business can repay the borrowed amount at any time, either partially or in full. Once repaid, the available credit is replenished and can be borrowed again.
4. Interest: Interest is charged only on the borrowed amount, not the entire credit limit. The rate may be variable, depending on the lender’s terms.
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1. Flexibility: Revolving credit provides businesses with the flexibility to access funds as needed without applying for a new loan each time. This is particularly useful for managing cash flow fluctuations and unexpected expenses.
2. Cost-Effective: Since interest is only charged on the amount borrowed, businesses can save on interest costs compared to fixed-term loans where interest is charged on the entire loan amount.
3. Quick Access to Funds: Revolving credit facilities typically offer faster access to funds than traditional loans, which can be crucial in times of urgent financial needs.
4. Improved Cash Flow Management: Businesses can better manage their cash flow, ensuring that they have sufficient working capital to meet operational expenses and take advantage of growth opportunities.
1. Potential for Overborrowing: The ease of access to funds can lead to overborrowing, resulting in higher interest costs and potential financial strain if not managed carefully.
2. Variable Interest Rates: Interest rates on revolving credit facilities can be variable, leading to uncertainty in interest costs. This can make budgeting and financial planning more challenging.
3. Fees: Some lenders may charge fees for maintaining the revolving credit facility, drawing funds, or making repayments. It is important to understand all associated costs before committing to a facility.
Revolving Credit:
Term Loans:
Revolving credit can be an invaluable tool for SMEs in Singapore, providing the flexibility and quick access to funds necessary for effective cash flow management and business growth. However, it is essential to understand the potential drawbacks and manage the facility carefully to avoid financial pitfalls. By weighing the benefits and challenges, SMEs can determine whether revolving credit is the right fit for their financial needs.
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