Looking for a way to improve your working capital? A business line of credit may be a good option. Learn what they are, how they work, and smart ways to use them.
Marci owns a small retail store, and is heading into her fourth holiday season in business. Like many small businesses, most of Marci’s revenue comes during the holidays. Her business has been growing, and she knows she’s going to need help around the store – she was barely able to keep up last year. She’d also like to invest more in marketing ahead of the season. Unfortunately, the costs of hiring a new employee and marketing happen up front. Marci knows she’ll have the money in a few months—after all, she’s investing in growth—but she’s not sure she can pay for either expense right now.
There are two types of borrowing needs for small businesses. One is when you require a large amount of money for a specific need, like the costs of getting started or opening a new location. You have a relatively fixed cost that you need in one lump sum, and you’re willing to commit to monthly payments over time. Many business owners will choose a lending solution, like a term loan, to cover these expenses.
The other main borrowing need, like Marci’s, is to improve managing her working capital. Working capital is the difference between your current assets and liabilities. Having strong working capital gives you the flexibility to invest in the growth of your business and weather slow periods. Savvy small business owners can prepare for these times by opening up a business line of credit.
What is a Business Line of Credit and How Does it Work?
Also known as a revolving line of credit, a business line of credit is a borrowing option that gives you access to a credit line that you can use as you need, rather than taking a lump sum payment.
You only pay interest on the amount of the credit line you use, and you can reuse the line as you repay. You also have more flexibility in the amount you borrow—you can borrow as little or as much as you like, up to your approved amount. It functions similarly to a credit card; however, it gives you access to actual cash. There are no fixed terms, so you can make minimum payments or pay off the full balance, depending on your current needs. Unlike a loan, you can also renew a credit line annually for continued access to take care of everyday expenses. Some banks may require you to fully pay off your balance, which is known as “resting the line,” once a year as terms for renewal.
Business Line of Credit Uses
While you can use a business line of credit for almost anything, one of the best ways to use a business line of credit is to improve your working capital to fund the growth of your company. This helps ensure that you’ll be able to promptly repay the amount you borrow. This could include:
- Purchasing inventory in bulk when good offers arise
- Marketing or PR costs
- Increased payroll
It could also be used to fund unexpected, short-term cash flow gaps such as:
- Payroll during slow seasons
- Paying a bill or vendor while waiting for receivables to come in
- Unexpected expenses
Whatever you end up using the business line of credit for, it’s better to have the capital when you need it rather than trying to apply for a line of credit as the need arises. Consider opening a business line of credit during a more stable time for your business, so that as opportunities or shortfalls arise, you’re ready to handle them.
Looking for ways to improve management of your working capital? Learn more about business lines of credit.
This article is intended for informational purposes only. Readers should consult their own financial advisers, attorneys or other tax advisors regarding any financial or tax strategies mentioned in this article.
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