A business line of credit is one of the most flexible and useful tools a business can have at its disposal. But what exactly is a line of credit, how does it work, and why is it something every business should consider having on hand?
What is a business line of credit?
A business line of credit works much like a credit card. It allows a business to borrow money up to a certain limit, but unlike a traditional loan, you only pay interest on the money you actually use. If your line of credit is approved for $50,000, but you only draw $10,000, you’ll only pay interest on the $10,000. This makes it a great solution for short-term needs or unexpected expenses.
Unlike a loan, where you receive a lump sum and must start making payments immediately, a line of credit gives you flexibility. You can borrow money when you need it, pay it back, and borrow again—without having to reapply for a new loan.
How does a business line of credit work?
Once you’re approved for a business line of credit, you can access funds whenever your business needs them, up to the approved limit. It’s often considered a revolving account, meaning as you repay the borrowed amount, your available balance replenishes. This is why it’s commonly compared to a credit card.
The key difference, though, is that a line of credit is typically used for larger business expenses or to cover cash flow gaps rather than everyday purchases.
Interest is charged on the amount you draw, and most lines of credit will have either monthly or weekly repayment terms. The interest rates for lines of credit can vary depending on your business’s financial health, credit score, and the lender’s terms.
Why is it important for every business to have a line of credit?
Every business should have access to a line of credit for a simple reason: “financial security”. It acts as a safety net for times when cash flow is tight or when an unexpected expense arises. Businesses don’t always know when they’ll face challenges, and having access to funds for a “rainy day” can be a lifesaver.
As the saying goes, the best time to apply for financing is when you **don’t need it**. This is because when your business is doing well and your credit is strong, banks are more likely to approve you for favorable terms. If you wait until your business hits a rough patch, lenders might see you as a risk and either deny your application or offer less attractive terms.
Examples of when a business line of credit can help
Retail business: Imagine you run a retail shop and discover an opportunity to purchase inventory at a deep discount from a supplier. However, it will take 60 to 90 days for the products to arrive, get stocked, and eventually be sold. A business line of credit can allow you to make the purchase now and pay it back once the products are sold. This ensures you don’t miss out on a great deal and keeps your shelves stocked without draining your cash reserves.
Construction company: If you own a construction business and are waiting for payments from clients who have terms of 30, 60, or even 90 days, a line of credit helps you bridge the gap. You can use the funds to pay your suppliers and workers while waiting for client payments. This allows you to take on more jobs without worrying about cash flow issues holding you back.
Wholesale business: Wholesalers often have to purchase large quantities of products upfront but may not get paid for weeks or months. A business line of credit can give you the cash you need to buy stock while you wait for your customers to pay you. This keeps your supply chain moving smoothly and allows you to fulfill larger orders without hesitation.
Service industry: Service providers, such as marketing agencies or IT consultants, often deal with delayed payments from clients. A line of credit can help cover operational expenses like payroll, software subscriptions, or marketing costs while waiting for clients to pay their invoices. This gives your business the ability to take on more clients and grow without being held back by delayed payments.
Seasonal businesses: For businesses that experience seasonal fluctuations in cash flow, such as landscaping, tourism, or holiday retail shops, a line of credit provides a reliable way to handle lean periods. You can use the funds to cover operating expenses during slow months and pay them back during the busy season.
Banks that offer business lines of credit
When it comes to securing a business line of credit, choosing the right bank is crucial. Here are some top options:
Chase: If you bank with Chase, they may offer you favorable terms on a line of credit. The advantage of working with Chase is that they often provide better terms to existing customers. However, there are a few factors to consider. Chase will review all your accounts and credit history, including balances and non-sufficient funds (NSF) on both personal and business accounts. Additionally, they assess all your business credit cards under one exposure, which could impact your approval.
Bank of America: Bank of America is another bank where existing customers may find it easier to get approved. However, they may ask for your business financials every six months to ensure continued growth. This requirement can give them more confidence in lending but may add a bit of administrative work for you.
Citizens Bank: If your business relies heavily on accounts receivable, Citizens Bank could be a great option. They specialize in accounts receivable (AR) lending and sometimes offer up to 85% of receivables that are within 90 days. This can be particularly beneficial for businesses looking to secure a line of credit based on outstanding invoices.
TD Bank: TD Bank is known for offering up to 25% of a business’s gross sales as a line of credit, which can provide significant borrowing power. However, they require that the borrower has an existing $25,000 tradeline on their credit report to qualify, so it’s important to meet this requirement before applying.
M&T Bank: M&T offers lines of credit for 10% to 15% of a business’s gross sales, but they require a full banking relationship to approve this type of financing. This means that having your business accounts with M&T is essential for securing a line of credit with them.
In all these cases, a business line of credit provides the financial flexibility needed to take advantage of opportunities, cover short-term expenses, and ensure smooth operations, no matter the industry.
Do you need help choosing the right business loan or SBA loan for your business? Or have any questions regarding this post. Feel free to reach out to me
Moshe Mutzen – Capitalize
Email: [email protected]
WhatsApp link: https://wa.link/vwp7i3
Key Bank and PNC are also good options