How to Utilize a Business Line of Credit for Your Business Needs

How to Utilize a Business Line of Credit for Your Business Needs
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An important part of owning a business is managing the associated finances, revenue, and expenses of the business.

It’s a challenge that many small business owners struggle with. Managing cash flow and having sufficient capital for operating expenses and growth is critical for a business to succeed. 

With a variety of small business financing options available, it’s not always easy to know which you should choose, or what option is best for a particular expense or purpose. One of the most valuable and versatile funding options for small businesses is a business line of credit. 

In this guide, we’ll explore the topic, and answer questions such as, “What is a business line of credit?” “How does a business line of credit work?” and explore the benefits and ideal uses of a business line of credit. 

This should help business owners to decide on whether or not they need or could benefit from a small business line of credit, and how best to utilize the line of credit to serve almost any business needs.

What is a Business Line of Credit?

Let’s start by defining what exactly a business line of credit is, and comparing it to other forms of small business funding that are typically available.

A business line of credit, as the name implies, provides you with a line of credit against which you can borrow. It does not provide you with immediate cash-up-front, as with the more familiar small business loan or similar financing options.

Business line of credit from Bizfly Funding

Rather, it’s much more akin to a credit card account (though provides cash for purchases, and doesn’t usually come with a credit card).

As a business owner, you can get approved for a business line of credit amount, which is the upper maximum you can have outstanding at any given time. You draw against the line as needed for your expenses or projects, or whatever your particular financial needs may be.

Like a loan, you have to pay interest on what you borrow, in addition to repaying the principal amount borrowed. The biggest point of differentiation between a business line of credit and traditional loan is that it is an ongoing or revolving facility.

When you take out a loan, you receive a lump sum of money up-front, and then pay it back on a specified schedule, with interest, over time. Once it’s repaid, that’s the end of the loan – you can apply for another, but that particular loan instrument is closed.

Business lines of credit are open-ended, and allow you to borrow, repay, and borrow again, as many times as you want and in the amounts that you require, without having to go apply for a new small business loan every single time.

How Does a Business Line of Credit Work?

The concept and functioning of a small business line of credit can more easily be illustrated with a hypothetical example.

How Does a Business Line of Credit Work

Consider a business, XYZ LLC, who fills out a business line of credit application and gets approved for a line of up to $100,000:

  • Upon approval for the line, they receive no money – simply access to the line. The outstanding balance is $0 out of a possible $100,000.
  • No interest payments or principal repayments need to be made since the outstanding balance is $0.
  • A few weeks later, XYZ needs to buy additional inventory, as products are selling faster than they expected. They use the small business line of credit to place an order for $20,000 in additional inventory.

    Their outstanding balance is now $20,000, with up to $80,000 remaining available on the line of credit.
  • Once they have an outstanding balance, every week or month, depending on their payment agreement, they will need to make a minimum payment of interest and principal on the outstanding balance.

    Like a credit card, they must pay the minimum, but can repay more, up to the total outstanding, at any time. Minimum repayment each month often ranges from 3 to 5% of the outstanding balance, varying by lender.
  • After another few weeks, they’ve paid down $1,000 on the balance. A piece of equipment breaks down, and they need it repaired urgently. They use the business line of credit for the $4,000 in repairs. Their balance outstanding is now $23,000, with $77,000 left on the line.
  • They continue to pay off and draw against the credit line as often as necessary, making somewhere between the minimum payment and total outstanding balance each period.

    So long as the credit line has less than $100,000 outstanding, they can continue to borrow against it as often and in whatever amounts as they would like.

Benefits of a Business Line of Credit

Many of the benefits available from a business line of credit stem from the way in which it works, allowing businesses to draw on the line when they need, in the amounts they need, and largely control some of the repayment process and speed as well.

Benefits of a Business Line of Credit

Specifically:

  • A business line of credit generally has a lower interest rate than credit cards, most business loans, and other forms of small business funding.
  • Borrowers only pay interest on the outstanding balance of the business line of credit, rather than on the maximum amount of the line. With a loan, you have to pay interest on the entire loan amount from day 1, even if you don’t need to use all that cash at once.
  • While some minimum repayment is required each period, and lesser payments mean more interest paid over time, there is a greater amount of flexibility for the business line of credit customer with regards to repayment than with traditional small business loans.
  • The line of credit can be used on-demand, whenever necessary, without requiring new loan applications, waiting, approval, and other processes.

    In this way, it is well-suited to the ongoing and variable needs of many small businesses, without taking up time, fees, and work to constantly take out and repay multiple small loans.

Ideal Uses for a Small Business Line of Credit

Many people choose to use a small business line of credit as a buffer or safety net for their operations, and don’t actually draw against the line of credit very often.

Rather, it provides them with a facility to borrow up to the maximum of the credit line in times of need, for urgent or unplanned expenses, marketing efforts, equipment repairs, up-staffing, inventory or materials purchases, and so on.

Ideal Uses for a Small Business Line of Credit

It can also be used as a revolving source of funds in companies that have highly variable cash flow, sales, or revenue rates, with limited cash on hand.

While it can be used for capital expenditure purposes, most experts advise it be used for operational expenses most ideally, with the shortest expense to repayment time possible, in order to minimize interest and maximize the value of the small business line of credit.

Business Lines of Credit from BizFly Funding

To learn more about business lines of credit and other small business funding products, you can apply or contact the expert team at BizFly Funding. BizFly Funding is a leader in small business financing in the US.

 As a private lender who specializes only in small business funding, they offer a full range of products, including business lines of credit and small business loans, to help small business owners manage their finances, fund their business, and reach their goals. 

You can apply online, get approved, and get funded usually within 1 business day – all without any collateral requirements, either!

Apply today at https://bizflyfunding.com.

Frequently Asked Questions about Business Lines of Credit

The business line of credit application process varies from lender to lender. 

At BizFly Funding, one of the top private lenders offering small business funding in the US, you can apply online in 30 minutes or less. 

You just need to meet the minimum eligibility requirements, which include a minimum monthly revenue of $10,000, at least 6 months in business, and a 650 or greater credit score.

Business lines of credit are one of the most valuable small business funding options you can have in your toolkit as a small business owner. 

It may not be the ideal solution for every kind of purchase or expense, but just having a small business line of credit as a safety net, in and of itself, can be an enormous asset for many small businesses.

No business can typically generate enough free cash flow to always self-fund its operations.

Major purchases, unforeseen expenses, targeted expansion, staffing increases, and the variability of the marketplace can often play a role in the bottom line. 

Having a credit facility available, via a business line of credit, can help provide the flexibility, security, and options that business owners need to be able to chase opportunities, meet demands, and keep their vendors, employees, and other stakeholders paid, on time, without issue.

Most business lines of credit require monthly repayment, similar to a credit card account.

This is usually 3 to 5% of the outstanding balance, made up of interest and principal repayments. More can be paid each period to pay off the balance faster.

You don’t pay anything on the part of your credit line that you have not drawn against – only what is outstanding and has been used. 

Exact details vary from lender to lender, and are disclosed as part of the business line of credit application and approval process at most small business lending companies and banks. 

The business line of credit rates charged are typically on par with or less than a small business loan.

Both are excellent options for small business funding. 

If you have a defined, near-term expense that requires financing, a small business loan may be the best choice.

For recurring, ongoing, or variable expenses, a small business line of credit is usually a better choice.

It is also ideal for simply having a safety net or additional borrowing power to respond to changing business needs and cash flow circumstances, which is not the case with a small business loan.

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