With a business line of credit, you can access a pre-approved amount of revolving funds from which your company can draw as needed, and only pay interest on the sum used. You can use the money to manage cash flow fluctuations and take care of unexpected expenses.
Keep reading to learn what is a business line of credit, how it works, and why it might be the right fit for your business.
What is a Business Line of Credit?
Essentially, a business line of credit is a flexible loan for companies that gives them access to pre-approved funding. It’s similar to a credit card in that you just pay interest on the money you use. You can withdraw from it at will to cover unanticipated expenses and to improve your cash flow.
Contrast the revolving lines of credit with a traditional loan, which disburses the whole amount upfront. And regardless of usage, interest is paid on the total loan amount.
Business Line of Credit Features
There are key points about a revolving line of credit loan:
- Flexible access. Businesses can borrow funds from their credit line as needed.
- Revolving nature. As with a credit card, you can repay the borrowed amount and then re-borrow up to the approved credit limit.
- Interest only on used funds. You only pay interest on the amount you borrow from the credit line — not the whole limit.
- Cash flow management. The line of credit permits you to cover unexpected expenses and manage cash flow fluctuations.
Ways to Use a Business Line of Credit
Here’s how to make the most of a business line of credit:
- Manage cash flow. This is a common reason credit lines are used, particularly if your company experiences delays in customer payments or has seasonal fluctuations. For example, you can use a business credit line to stock inventory in advance of the busy holiday season, and clear the balance as revenue comes in.
- Bridge gaps between projects. If your business works on a project basis, a business credit line can help cover expenses between jobs. For example, a construction company awaiting payment for a finished project can use a line of credit for payroll until the funds come in.
- Handle unexpected expenses. A business line of credit can serve as a safety net and ensure that your business can handle emergencies without interrupting operations or taking out expensive short-term loans. Say a key piece of equipment needs repair. A business line of credit can swiftly resolve the issue with no disruptions to the business.
- Take advantage of business opportunities. There are times when an excellent opportunity presents itself that calls for immediate capital. A business line of credit provides the flexibility to move quickly on opportunities that could grow your business without awaiting loan approval. For example, a contractor may need to buy materials up front for a newly secured new project. A credit line can be used to cover such costs.
- Funding marketing and growth efforts. Such initiatives commonly require investments up front that may not produce returns right away. A business line of credit can help pay for these strategies and keep your business healthy in the interim. For example, your business could use a line of credit for an online marketing campaign, increasing sales growth without using too much working capital.
- Buying inventory. A line of credit can help businesses that depend on inventory manage supply needs. Say you’re a restaurant owner who could use a business line of credit to buy bulk ingredients at a discount, with the understanding that the balance can be repaid after customer sales ramp up.
- Fortify business credit. You can strengthen your business’s credit profile by responsibly using a business line of credit. By borrowing, making timely payments, and maintaining low credit usage, you can show lenders that you’re financially responsible. At length, this can boost your credit limit and provide access to improved terms for future financing. For example, your business may frequently use a credit line for short-term expenses. If you consistently repay the balance on time, your favorable credit history will make it easier to gain more financing later.
In Summary
What is a revolving line of credit? It’s a flexible and powerful tool for small business owners. It offers access to funds for business needs without the strict repayment terms of a conventional loan.
