A business line of credit1 can be a major help to a small business because it can be used for a variety of purposes that help lead to growth and profitability. A credit line allows a business to draw on funds as needed with flexible repayments. Here are just a few of the ways you might use your line of credit:

Working Capital

The amount of working capital needed to run a company varies depending on the business, but a line of credit can help you satisfy some of your most pressing financial needs, such as cash flow, inventory, marketing, hiring, etc.

As Investopedia explains, "A company’s working capital is a reflection of its operational efficiency and budget management. If a business has more current liabilities than assets, its working capital is negative, meaning it may have difficulty meeting its financial obligations. A company with a very high working capital figure, conversely, is easily able to pay all its expenses with ample funding left over."2

Handling the Unexpected

Having available credit helps you handle unexpected expenses and hardships that arise. Many businesses know all about this after living through a global pandemic. You never know what challenges are around the corner. The unexpected isn't limited to pandemics, however. You may face equipment malfunctions or other major or minor disasters, not to mention unforeseen opportunities that may require some cash outlay if you want to quickly take advantage of them.

Revolving Money

Business credit gives you the advantage of having a revolving amount of available funds. With a loan, you pay back the borrowed amount and that's it. With a business line of credit, you only borrow funds when you need them, and pay them back on your own schedule. Every time you make a payment, you increase the amount of credit available for the next time it’s needed.

Building Business Credit

Responsible use of your credit line helps you build your business credit. If you make your payments on time on a regular basis and maintain a good credit score, you may be able to increase your borrowing power. This, in turn, gives you more working capital.

Advantages Over a Credit Card

While business credit cards can also be helpful for some of the things listed above, a line of credit has advantages over a credit card. You're likely to have a higher credit limit. Additionally, the APR (Annual Percentage Rate) is likely to be lower.

Do You Need a Secured or Unsecured Line of Credit?

Business lines of credit may be either secured or unsecured, and which one is best for you depends on your particular position.

As Jamie Johnson at Business News Daily explains, "A secured line of credit requires some type of collateral. For instance, you could use property or equipment to secure the line of credit. Banks and credit unions commonly give out secured lines of credit. This collateral gives the bank more security because, if you default on the line of credit, it can collect on the collateral. An unsecured line of credit doesn't require any collateral. This is ideal for most business owners, because you're not putting your business or personal assets at risk."3

Secured lines of credit tend to have lower interest rates, and lower credit scores are generally accepted for approval. Additionally, you may see longer repayment terms.

Drawbacks

While the pros usually outweigh the cons when it comes to a business line of credit, no method of borrowing money is without potential drawbacks. For example, a line of credit may cost you more than a loan if you have to pay fees, so make sure you are aware of what fees you may be incurring before taking out the line.

As with any debt, you will also have to be careful about managing it and paying it off. You don't want to spend too much on credit and get in over your head. Only open a business line of credit if you know you can handle it responsibly.

While you'll have to evaluate your own business's situation, a business line of credit may be an ideal source of financing for your needs. Talk to your business banker to determine the proper course of action.

 

1. Subject to credit approval. Terms and conditions apply. See a banker for details.

2. https://www.investopedia.com/ask/answers/102915/how-much-working-capital-does-small-business-need.asp

3. https://www.businessnewsdaily.com/16183-line-of-credit.html