Why You Should Have a Business Line of Credit

Owning a business often comes with challenges, including issues with cash flow and other unexpected hurdles. A business line of credit can cover a variety of short-term financial needs, from unexpected expenses to covering payroll and supplier fees when revenue is down. A business line of credit can help small business owners secure funds to cover immediate needs.

A business line of credit is a flexible form of financing that businesses can access as needed. A line of credit is usually revolving, meaning that you can tap into it repeatedly, as long as you haven’t hit your credit limit. Once you secure your line of credit, you will need to pay back the amount you draw on (plus interest) within a predetermined repayment period. You could also pay back the amount immediately to save on interest.

In many ways, a business line of credit is similar to a business credit card. However, you can transfer money from your line of credit directly into your bank account, whereas with a credit card, a cash advance will likely come with hefty fees. Plus, credit cards tend to have higher APRs and shorter repayment terms.

You have quick access to your cash. Unlike a loan, a line of credit allows you to draw funds when you need it, rather than taking out one lump sum from the start. When you’re in a pinch and you realize you need working capital, the ability to hop on a computer and initiate a loan from your available funds is priceless.

You pay back only what you’ve used. not the total amount approved. Think of a line of credit similarly to a credit card: a lender gives you a line of credit, which you have access to whenever you need it. Unlike a term loan, where you take a lump sum of cash and have to make regular payments, a line of credit can be utilized as needed. You repay as you use the funds, and only pay interest on funds drawn.

Cover your expenses anywhere, anytime. With a line of credit, you can cover any unexpected expenses or any upcoming expenses you know you’ll need help with. Since you are not required to initiate a loan for the entire amount you are approved for, the rest of those funds are sitting there ready for you when you need them. This benefit allows you have the comfort and flexibility that traditional bank loans don’t offer.

Cover those in-between costs. LOCs are great for covering those in-between amounts, seasonal costs and months of slower production. In some instances, your credit card wouldn’t provide enough, but the cost doesn’t warrant taking out a loan. That’s where LOCs come into play. See how much the bill is and take exactly what you need.

Maintain control of the funds. With a business line of credit, you can use the funds however you see fit: for ongoing operating costs, to cover gaps in cash flow, or take advantage of unforeseen opportunities or challenges. You don’t need to have a specific use case outlined to secure the cash.

Build your business’s credit. If you’re looking to improve your business’s credit score, a line of credit can help you do so. Making your payments on-time reflects positively on your score and can help you receive a larger line of credit in the future.

Separate personal and business expenses. One issue many small business owners face is keeping that divide between their personal expenses and their business expenses. With a line of credit dedicated to your business, you can smoothly create and track business expenses.

Take advantage of affordability. A line of credit typically has a lower interest rate than short-term loans of comparable size. Of course, rates and terms vary depending on your credit score, annual revenue, and other financial factors.

Get easier approval. Some financial institutions accept those with poor credit. This makes a line of credit a solid alternative when you can’t get a traditional loan. It’s also an excellent way to improve your credit score (if used responsibly).

Help your short-term goals. A line of credit can be used multiple times and is something you can get approved for before you need it. It doesn’t serve one specific purpose. A line of credit is great used as a short-term solution for different things such as marketing, renovations, buying inventory or even covering payroll.

Most businesses — large retailers to neighborhood mom-and-pop stores — can benefit from a business line of credit. It’s a tool that you can always have at your disposal but not draw on unless you need it. A business line of credit can sustain you when cash flow is low. In addition to seasonal businesses, new businesses can benefit especially from a line of credit that can keep them going when times get tight.