5 of the Best Ways To Use Your Business Line of Credit

If you’re a small business owner, it’s important to have financial flexibility to see you through the ups and downs of entrepreneurship. You will probably encounter slow periods, or an emergency expense or two that will pop up.

That’s where a business line of credit can help.

A business line of credit has many uses. And while it is often used for short-term expenses, a business line of credit also puts funds right at your fingertips for times when you need to make small investments or upgrades — fast. Compared to a term loan, which provides funding in a single lump sum, a business line of credit gives you access to a credit limit that you can draw from as needed.

Here are five of the best ways that business owners can use a line of credit.

Uses for a business line of credit.

In today’s fast-paced world, having quick access to business financing can make all the difference. A business line of credit can function as a safety net, giving you the liquidity you need to manage your cash flow. And it can be used to pay for operational expenses that typically aren’t covered by a business credit card — vendor payments, monthly leases, payroll, for example.

In no particular order, here are some of the standard ways that small business owners use a business line of credit to keep their business running smoothly.

1. Cover emergency business needs.

A business line of credit gives you a financial cushion to pay for emergency business expenses that can disrupt your operations or impact on your bottom line. Some examples include:

Equipment. Fund equipment and technology repairs to get back up and running with minimal downtime.
Supplies and materials. Cover unexpected price increases or for additional inventory.
Property damage and theft. Repair or replace what insurance won’t cover.
Professional services and taxes. Cover tax payments and legal services or advisor fees.
Utilities. Cover unpredictable utility costs when they spike above your budget.

2. Stabilize your cash flow.

When your cash flow isn’t consistent, a small business line of credit can give you extra flexibility. You can make draws as needed to ensure things continue to run smoothly — until your income picks back up. Here are some ways a line of credit to close cash flow gaps:

Seasonal slow-downs. Cover bills and expenses that don’t stop in your off-season.
Customers who pay late. Fill in the gaps when customers don’t pay on time.
Low-revenue periods. Use as a buffer for times when sales are slow.
Bookkeeping mistakes. Keep your cash flow on track if forecasts or expense records fall short.
Low cash reserves. Have at the ready for peace of mind when cash flow is tight.

3. Fund expansion and growth.

When used wisely, a business line of credit can be a great tool to help your business grow. A line of credit gives you quick access to working capital, so you can quickly seize opportunities, including:

Acquiring new customers. Fund sponsorships or co-branding efforts that build awareness.
New product launches. Help fund design, packaging or other miscellaneous costs.
Purchasing at a discount. Purchase inventory or supplies in bulk if it saves you money in the long run.
Software licensing and subscriptions. Invest in technology and other ways to work more efficiently.
Advertising or marketing campaigns. Purchase media, signage and local advertising to promote your business with marketing.

4. Invest in people, places and things.

Prioritizing the right investments can translate into more revenue and profits for your small business. Whether you’re a brick-and-mortar retailer or an online startup business, here are some more ways to use a business line of credit:

Securing prime retail space. Cover moving or rental costs that can lead to increased foot traffic or higher sales.
Modernizing decor. Make a positive impression on your future and current customers.
Employee training. Help improve efficiency, productivity and employee morale.
Customer service improvements. Invest in customer experiences and improvements that drive loyalty and satisfaction.
Employees. Cover costs associated with hiring and recruitment, or teambuilding and training.

5. Build business credit history.

Responsible use of your line of credit can help you build positive business credit history and your credit rating. To get the benefits of using a business line of credit, make sure you’re working with a lender that reports activity to the business credit bureau. Here are some ways to use a line of credit that builds credit history:

On-time payments. Demonstrate making monthly payments on time.
Debt-to-credit ratio. Maintain a healthy ratio that shows responsible line management.
Good credit score. Obtain lower interest rates and higher loan amounts in the future.
Positive financial track record. Improve your business’s overall creditworthiness.

Deciding when to use your business line of credit.

While term loans might be more suitable for larger projects due to their higher funding limits, a line of credit offers flexibility for smaller needs. It can also help your business stay nimble and act quickly — with available credit that is always ready to draw when you need it, saving you time in the approval process compared to a small business loan.

Here are some factors to consider when you’re deciding whether or not to use a small business line of credit:

Urgency. Use your line of credit for immediate needs that can’t wait for traditional banks for approval.
Cost. Compare the interest rates and fees of your line of credit with other types of financing options to ensure it’s the most cost-effective choice.
Purpose. Reserve your line of credit for short-term needs and consider term loans for larger, long-term investments.

How do I get a business line of credit?

Securing a business line of credit involves several steps. Here’s a simplified guide:

Assess your creditworthiness. Lenders will review your personal and business credit scores. Check your credit report ahead of time to ensure your financial documents are in order and address any outstanding issues and eligibility.
Prepare financial documents. Gather financial statements, tax returns and other relevant documents that demonstrate your business’s financial health.
Research lenders. Compare various lenders, including traditional banks, credit unions and online lenders, to find one that offers favorable terms and conditions.
Apply. Submit your application along with the required documentation. The lender might ask you follow-up questions during the application process.
Review terms. Carefully review the terms and conditions of the line of credit offer. Pay attention to interest rates, draw fees and repayment terms.
Use Responsibly. Once approved, use the line of credit wisely and make timely repayments to maintain a positive credit relationship.

A business line of credit is more than just a funding source; it’s a versatile tool that can help you seize opportunities, manage emergencies and fuel growth. By understanding how and when to use it, you can maximize its benefits and ensure your business remains successful for years to come.

How small business owners are using their lines of credit.

For Starting Up
I started my business as a solopreneur more than 20 years ago thanks to a $10,000 line of credit. With that money, I invested in a computer and printer, office furniture, and a brochure to pursue business plan clients.

Today, my boutique ghostwriting agency is thriving because of those initial investments. Granted, I’ve upgraded my computer and printer several times since then, but being able to position myself as a successful entrepreneur with high-quality documents and marketing pieces from the outset was critical to quickly landing clients. I paid it off over the course of a couple of years, balancing reinvesting in the business with paying down the debt.

Dr. Marcia Layton Turner,
Award-Winning Author & Business Book Ghostwriter
Marcia Layton Turner Ghostwriting

For the Long Haul
At first, when we were growing our business, the line of credit gave us the cash we needed to pay for unexpected costs and make investments in essential areas like technology and hiring new staff. For example, during one of our busy times, we had to hire more people to handle many cases. The line of credit allowed us to hire talented people without worrying about money, ensuring our customers got the excellent service they deserved.

In another case, we had to update our case management software to make things run more smoothly and help clients communicate better with us. Our line of credit helped us pay for this investment, which made us much more efficient and satisfied with our work.

By maintaining a good relationship with our bank and handling our line of credit well, we’ve kept interest rates low and ensured we always have access to money for opportunities or problems.

Mark Hirsch,
Personal Injury Lawyer and Co-Founder
Templer & Hirsch