5-min read Aug 16, 2023

Unlocking Business Growth: Is a business line of credit a good idea? How to know, and what to use it for

Unlocking Business Growth: <strong>Is a business line of credit a good idea? How to know, and what to use it for</strong>

Your business is growing. Will a business line of credit power you forward, or start unnecessary habits of debt?

How do you decide whether it’s worth investing the time, effort and relationship to get approved for a business line of credit?

Is it even healthy to bring outside funding into your business?

Shouldn’t you be relying on revenue alone to foster growth?

In this article, we’ll talk about:

  • What’s a business line of credit? How is it different from other loans?
  • What can you do with a business line of credit?
  • Is it right for MY business? 3 signs that tell you

What is the purpose of a business line of credit? How does it work?

The significant benefit of a line of credit:

A business line of credit gives you access to a sum of funds that you can withdraw as needed. You only pay interest on what you use.

Unlike a typical loan, where you take out a bulk sum of money, and then repay it slowly on a schedule, it acts more like a credit card — borrow what you need, when you need it, up to your limit. Except unlike a credit card, the interest rates on a line of credit are typically very low.

A business line of credit is often described as a “revolving” loan, meaning the outstanding money goes up or down based on how much you borrowed.

Your limits might change: most lenders will reassess how much you can get weekly, monthly or even daily.

As your business grows and your stability or collateral increases, your line of credit will often increase with it.

Read more about the pros & cons of a business line of credit (as well as how it works) →

How can I use it? What’s the best way to make the most of it?

You should use your business lines of credit as “working capital” for short-term needs, such as:

  • Inventory — especially when you need to buy bulk, or have bigger seasonal expenses, such as stocking up before the holidays
  • Payroll — particularly when invoicing, payments or collections are often delayed — eg if you only get paid 30 months after the product is shipped or service is complete
  • Growth — expanding your sales team, adding a new service or product, or marketing costs, where you have to outlay money for a future return on investment.
  • Unexpected or one-off expenses — such as new equipment, payment delays or more.

Is a business line of credit smart for your business? 3 signs you could benefit from a business line of credit

In general, a business line of credit is always useful as a safety net.
Like when federal holidays overlap check processing. Or an unexpected expense crops up. It’s peace of mind — knowing it’s there for those times you need backup.

Note: If a backup short term safety net is your primary concern, payroll-funding is much cheaper, simpler option, since there are no fees at all and it’s available on the same-day you apply.

You can read about how it works here →

Other than a safety net, here are the 3 most common signs you’ll benefit from a business line of credit.

  1. Frozen revenue from bills not yet paid, or inventory not yet sold

Many businesses struggle with the long, exhausting process of waiting for payments on accounts receivable.

That check that’s still in the mail. Government or insurance payout that needs a 30-day period before filing. Merchant deposits just don’t come through in time.

There are so many moving parts that often, by the time you get paid, it’s 120 days since you finished the job. That leaves you with poor cash flow, and very little working capital to pay employees or purchase inventory.

  1. Growth that’s on hold 

Often —especially for small businesses in early growth stages— projects come up that exceed your current bandwidth.

  • You don’t have the employees or resources on hand to service a bigger project than anything you’ve ever handled.
  • Or your team/inventory are maxed out with current orders in the pipeline.

Declining projects means you risk losing those customers. Then, once you’ve grown your capacity to serve more clients or fulfill bigger orders, they no longer think of you as their supplier or service provider. They’ll simply stop reaching out.

In a case like this, your attempt to keep our business stable and use only current working capital is blocking your natural business growth.

  1. Inconsistent cash flow

Unlike a negative cash flow, your cash flow is simply unstable, and this instability is usually due to outside factors. It can be due to rapid growth, or early stages in businesses before you’ve developed strong processes for stability.

Similar to the first reason, whether it’s late checks, or payments needed between checks processing for a big project, keeping a stable line to borrow from is a good practice for stabilizing your cash flow.

Applied, but got denied?
Here’s how to increase your chances of getting approved for a business line of credit (what the banks don’t tell you) →

Morris Reichman


Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.

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