Business Loans

Purpose And Benefits Of A Line Of Credit

Oct 21, 2022 • 10+ min read
should you get a business line of credit
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      Purpose And Benefits Of A Line Of Credit

      A business line of credit is a pre-agreed amount of money that you can borrow when you need it and pay back when you don’t. As such, it’s a useful and popular tool that businesses of all sizes use to overcome cash flow gaps. But funds from a line of credit can also be used to grow the business in many ways, helping business owners accomplish more, faster.

      That’s because you can use the money from a line of credit any way you wish. Unlike a traditional bank loan that must be used for the specific purpose, with a line of credit you can draw funds whenever you want, use them however you want, and draw the exact amount you want. If you don’t need the money right away, don’t use it. You can repay the credit line at any point (as allowed by your credit agreement), unlike a term loan from a bank, which has a fixed monthly repayment schedule.

      Benefits of a Business Line of Credit for Small Business Owners

      Finding the right funding for your small business needs can be tough. There are so many options to choose from. Lines of credit (LOCs) are perhaps the best option for small business owners. Here are 10 reasons why small businesses can benefit from a line of credit over a loan.

      1. 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. This is especially true with lines of credit that are powered online. 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.

      2. 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. Let’s say you want to renovate your store. You estimate the total costs of being $35,000, and you’re approved for a line of credit for $40,000. However, once you begin the renovating process, you find that the costs are much lower than expected (let’s say, only $20,000). You can take out just that $20,000, and pay back the interest on that amount, not the $40,000.

      3. 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.

      4. Your line of credit can be unsecured.

      Unsecured loans are a lot less risky for you and your business, and your credit score really comes into play on getting an unsecured loan. With an unsecured loan, you’re at less risk should you default on your payments. Defaulting only increases your rate in an unsecured loan whereas, in a secured loan, the lender is able to seize your assets (personal, business or both) in order to receive what they’re owed.

      5. Cover those in-between costs.

      When is the cost is too much to throw on a credit card but not large enough to justify taking a loan out, LOCs are great for covering those in-between amounts. For example, if you need to do maintenance on your truck for your company, it can sometimes be pricey. 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.

      6. 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.

      7. 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.

      8. 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.

      9. Find lower interest rates.

      Especially when you’re starting a new business, finding an affordable interest rate is crucial to all business owners. Lines of credit tend to carry lower interest rates as they aren’t interest-rate driven (unlike loans). However, these rates tend to be variable.

      Ways You Can Grow Your Business With a Line of Credit

      When opportunity knocks, here are just six ways you can put that money to work to take your business to new heights.

      Form an Alliance with Another Business

      Many freelancers or small businesses come together to work towards a common goal, without losing their individual brand identity.

      Alliances are a great way to combine complementary skills and break into new markets, without the risk of doing it totally alone. Companies participating in alliances report that as much as 18% of their revenue comes from their alliances.

      Start with something as simple as co-sponsoring an event or workshop together, running a marketing campaign leveraging the power of both brands and your combined skills, or working on a small sales opportunity to get a feel for how well you work together. And, remember, they don’t have to be permanent; unlike with a formal partnership, if it isn’t working, you have the option of walking away.

      Having a business line of credit on hand gives you the flexibility to take these baby steps and cover costs such as legal fees (NDAs, contracts, liability protection, etc.) and co-marketing when the need arises.

      Bring Fresh Thinking to Your Business

      Looking to streamline your operations or breathe new life into your sales strategy? If the old way of using invoice factoring companies are not working out, you may want to consider new options. A line of credit is a great way to help you realize new opportunities with the help of a consultant.  

      For example, if you have a critical selling season coming up but the same old approach is getting tired, hire a sales consultant to advise on new strategies and tactics. Or, if you’re a solopreneur looking for guidance in how to take your business to the next level, working with a career development coach can bring you fresh insights and helpful training.

      Win a Government Contract

      The U.S. federal government is the world’s biggest buyer of goods and services and sets aside contracts specifically for small businesses. Lucrative as it is, it takes money to win your first government contract. According to the SBA, some businesses spend between $80,000 and $130,000 to earn their first contract and two years to see any return on investment. For example, if you want to work with the Department of Defense, you must be able to invoice and receive payments electronically, which may require you to invest in new electronic systems. You’ll also need a skilled team of experts who knows how the process works. In an ideal situation, this team would include a proposals manager, contracts manager, experienced sales team and marketing support. While you’re at it, you may want to consider SBA loans to help accelerate your business.   

      These investments aside, you’ll also benefit from healthy cash flow. The government doesn’t always pay on net-30 terms, so a line of credit can be a good choice to help you make the necessary investments and be able to draw on those funds quickly, even as soon as the next business day.

      Get a Marketing Edge

      Small business marketing spend has remained consistent over the years, hovering at around 10% of overall budget. But one trend is emerging – a strong increase in digital channel investment. At least half of small businesses plan to increase spending on social media marketing, content marketing, and online lead generation, whereas print, radio, and other traditional channels are set to see a net decrease in total marketing investment.

      Getting into specifics, 75% expect to increase their Google Adwords spend and 71% will bolster their Facebook investment. With more potential clients researching everything online before making a decision about who to work with, can you afford not to make an investment in your online marketing?

      But where do you start? What’s the best approach? A marketing consultant can help you pull together a strategy that works for your budget, goals, and expected revenue returns, and a business line of credit is a great way to finance your campaign because you can draw on it at each stage of your campaign, as and when the costs come in, repay it at your convenience, and replenish the credit until you need it again.

      Franchise your Business

      Franchising is a great vehicle for expansion because the onus is on the franchisee to invest in opening locations and perform well, while you reap a share of the profits. Once you’ve made the initial outlay it’s down to your franchisees to bear the costs of establishing new outlets.

      Franchising may be a low-cost way to expand, but it’s not “no-cost”. You’ll need the help of a franchise attorney to draw up a franchise agreement, work with a franchise consultant to develop training programs and marketing materials, and protect your intellectual property, among other steps. It may also take some time to see a return in that initial investment which raises the question of financial exposure.

      While there is no set cost for franchising a business, each business is different, many of the costs can be borne with a business line of credit. Since the process of setting up a franchise network takes time, you can dip into a line of credit of say $100,000 and pay it off at your convenience. A business line of credit operates similarly to a credit card, with a revolving balance, but they tend to offer lower interest rates, and there are no fixed payments.

      Win a Big Contract, Without Cash Flow Woes

      Opportunities like large contracts don’t come along often, but they frequently require upfront investment in equipment, supplies, and employees, which can quickly erode cash flow. A line of credit is perfect for this kind of opportunity because it gives you the flexibility to spend only what you need and have access to those funds quickly.

      You always have other options for small business funding, however, if you apply for a loan, you must specify how you’ll use those funds, and it can take some time for the funds to be approved. A line of credit is more flexible. Once you start working the contract, you can pay off the line of credit to replenish it and use it again when the next need arises.

      Not All Lines of Credit are Created Equal

      There are literally hundreds of ways to use your business line of credit. From buying new software so you can scale your customer relationship management capabilities, to launching marketing campaigns that will take you into new markets. But not all lines of credit are created equal. Many banks and fintech companies in the U.S. rely solely on a small business owner’s personal credit score for underwriting. You may find this problematic if you’ve leveraged your credit to build a successful businesses, bruising it in the process.Instead, look for a lender that considers more factors like your total business performance, alongside your credit. Other things to look out for include the ease of the application process and approval timeline. Today, neither of these steps should take more than a few hours. If they do, don’t be shy about looking for quicker, better options.

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      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

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