Skip to content

When to Consider a Line of Credit for Your Small Business

Capital can make all the difference when you are trying to seize opportunities and beat the competition. For entrepreneurs and business owners, having a financial lifeline to navigate the ebbs and flows of the market is not just advantageous; it’s essential. That’s where a business line of credit comes into play. Let’s explore the crucial considerations you need to make when considering a line of credit for your small business, as well as how to go about getting one.


What is a Business Line of Credit?

A business line of credit is different from a traditional term loan. Instead of receiving a lump sum that you gradually pay back over time with a fixed payment amount, a line of credit gives you a certain amount of credit to borrow from. In many ways, a business line of credit is like a credit card, although the credit limit is usually higher with a line of credit. Like a credit card, you can borrow a certain amount of money, pay off what you borrowed, and then borrow more.


In other words, a line of credit is there when you need it.


How Does a Business Line of Credit Work?

So far you know that a business line of credit functions a little like a credit card. You may also hear it referred to as a revolving line of credit, because you will have access to a pool of money for as long as the line remains active. This gives you, the business owner, a great amount of flexibility, because you can decide exactly when and how that line of credit is utilized.


Furthermore, interest on the line of credit is only accrued on the amount that you have used. In other words, if you have a credit limit of $5,000 but only use $2,500 of it on a purchase, the interest applies solely to the $2,500. Additionally, while there is a predetermined repayment period for the money you used, there is no fixed amount, only a minimum payment.


What Can You Use a Business Line of Credit On?

Here is when to consider a business line of credit: When you need funds for a medley of things. Business lines of credit give you the option of applying the money however you wish, as long as it is for the growth and success of your business.


Here is a look at some of the ways a business line of credit can be used:


  • Working Capital:

    Covering day-to-day operational expenses, such as payroll, rent, utilities, and inventory purchases, is one of the primary uses of a business line of credit. It helps ensure your business has enough working capital to function smoothly.

  • Inventory Purchases:

    Businesses often use lines of credit to purchase additional inventory during peak seasons or to take advantage of bulk purchase discounts. This ensures you have sufficient stock to meet customer demand.

  • Equipment Purchase:

    You can use a line of credit to finance the purchase of new or replacement equipment necessary for your business operations. This is particularly useful for businesses that rely on specialized machinery.

  • Expanding or Renovating:

    If you plan to expand your business location or undertake renovation projects, a line of credit can help cover the costs of construction, remodeling, or leasehold improvements.

  • Marketing and Advertising:

    Launching marketing campaigns or advertising initiatives to promote your products or services can be expensive. A line of credit provides the necessary funds to invest in marketing efforts to attract new customers.

  • Emergency Expenses:

    Businesses often encounter unexpected expenses, such as equipment breakdowns, repairs, or legal fees. A line of credit serves as an emergency fund to address these unforeseen costs.

  • Seasonal Fluctuations:

    Many businesses experience seasonal fluctuations in revenue. A line of credit can help bridge revenue gaps during slow seasons and ensure the smooth operation of your business.

  • Hiring and Payroll:

    When your business is ready to expand its team or bring on seasonal employees, a line of credit can cover hiring costs and ensure timely payroll processing.

  • Opportunity Seizure:

    Lines of credit allow you to capitalize on sudden business opportunities, such as bulk purchasing of inventory at a discount, acquiring a competitor, or expanding into new markets.

  • Debt Consolidation:

    If you have high-interest debt, you can use a business line of credit to consolidate existing loans, potentially reducing your overall interest costs and simplifying your debt management.

  • Cash Flow Management:

    Sometimes, businesses experience delays in receiving customer payments. A line of credit can help manage cash flow gaps by covering immediate expenses while waiting for outstanding invoices to be paid.


What are the Pros and Cons of a Business Line of Credit?

A business line of credit is a versatile tool that gives your small business numerous advantages. Unfortunately, these tools also have some drawbacks that need to be weighed. Here are the pros and cons for your consideration:


Pros of a Business Line of Credit


  • Flexibility:

    Business lines of credit provide flexibility. You can access funds up to a predetermined credit limit, and you only pay interest on the amount you borrow. This flexibility is beneficial for managing cash flow gaps, covering unexpected expenses, or seizing growth opportunities as they arise.

  • Easy Access:

    Once approved, you can access funds from your line of credit whenever you need them, making it a convenient option for addressing immediate financial needs.

  • No Fixed Repayment Schedule:

    Unlike term loans, lines of credit do not come with a fixed repayment schedule. You can make minimum monthly payments or pay off the balance in full, depending on your business’s financial situation.

  • Builds Credit:

    Responsible use of a business line of credit can help improve your business credit score, potentially leading to better financing terms in the future.

  • Emergency Fund:

    A line of credit can serve as an emergency fund for unexpected expenses, such as equipment breakdowns or revenue fluctuations.


Cons of a Business Line of Credit


  • Interest Costs:

    The interest rate for a business line of credit will always be higher than the interest on a traditional business term loan. You will need to manage you balance wisely to avoid excessive interest.

  • Overborrowing Risk:

    The revolving nature of a line of credit can lead to overborrowing if you’re not disciplined with your finances. This can result in long-term debt and financial stress.

  • Variable Interest Rates:

    Some lines of credit, especially credit cards, may have variable interest rates that can increase over time, impacting your overall borrowing costs.

  • Credit Limit:

    Your creditworthiness determines how much credit you are given. Newer or smaller businesses tend to have a limited credit history, meaning you will not qualify for a substantial credit limit.


How Do You Get a Business Line of Credit?

Having you been thinking, “I need a business line of credit” recently? The process is straightforward. You can get a business line of credit through a number of lending institutions, including credit unions, banks, online lenders, business loan brokers, and so on. It is highly recommended that you shop around a little to compare lenders and their rates. Once you have settled on a lender, you will need to fill out an application.

The complete an application, you will need:


  • Personal credit score:

    This qualification will vary from lender to lender. However, the majority of lenders will check your credit score. Most will want to see a personal credit score between 620-650. Others will need a higher score. Banks often want a score of 680+.

  • Revenue:

    You can prove your revenue through bank statements, tax returns, or other financial statements.

  • Business history:

    In order to qualify, you often need to have been in business for two years or more.

  • Entity:

    Some lenders will not consider sole proprietors for business lines of credit. You may need to form a business entity, such as a C Corp, S Corp, or LLC.

  • Bank account:

    You must have a business bank account in order to apply through most lenders. Make sure you have this squared away.


When you have these things in order, you can begin considering a business line of credit.


Business Line of Credit Rates and Fees to Consider

As with any loan or credit card, business lines of credit come with fees and interest. Typically, the rates for business lines of credit will range anywhere from 10-80% APR, which is vast. The APR you receive will depend on things like your credit score, financial history, time in business, the lender you chose, and other factors.


Generally, the stronger your credit and business history, the lower your interest rate. Yet, even if you secure a lower interest rate, there are certain fees that you will have to pay, including:


  • Account maintenance fee:

    Maintenance fees are monthly or annual fees associated with keeping your account and business line of credit active.

  • Draw fee:

    Some lenders will charge a fee each time you drawn upon the line of credit.

  • Origination fee:

    When your application is processed, you are charged an origination fee by the lender.

  • Inactivity fee:

    Lenders may charge you when you have not used your business line of credit for a certain length of time.

  • Late fee:

    If you remit payment later than the due date, you may be charged a late fee.


Looking for a Line of Credit for Small Business Owners?

Now that you know more about credit lines for small businesses, you can figure out when or even if this means of funding is a good idea for you. A business line of credit serves as a lifeline, empowering businesses to respond to opportunities, weather challenges, and pursue growth initiatives with confidence. The journey toward securing a business line of credit begins with informed decision-making and the right financial partner. New Bridge Merchant Capital, with our commitment to helping businesses thrive, stands as a beacon of financial expertise and support.


Don’t wait until your business faces a cash flow crunch or an unmissable opportunity slips away. Consider a line of credit today and equip your business with the financial resilience it deserves. Call New Bridge Merchant Capital at 844-228-0593 to learn more about your loan options.

Work With a Leading Commercial Lender

At NewBridge Capital Solutions, our loan products can help businesses of all sizes. With our exceptional customer service and reputable funding, we have become a trusted leader in the commercial finance industry. If you want to apply for a term loan that can provide working capital for your business, make sure to contact us.
Skip to content