business working capital line of credit

Use a Business Working Capital Line of Credit to Grow Your Business

Last Updated on March 26, 2024 by Gerry Stewart

A business working capital line of credit is a short-term financing option that provides a flexible credit line for covering operational expenses such as rent and payroll. It allows businesses to access funds as needed, making it a valuable tool for managing day-to-day financial needs. Lenders offer pre-approved credit lines, and businesses can repay the balance as their cash flow improves

As a business owner, you may be facing disrupted supply chains, changes in consumer demand, cash flow issues, or the need to pivot your operations.

In these challenging times, access to working capital is more important than ever to sustain and grow your business. A business working capital line of credit can provide you with ready access to financing that is both flexible and cost-effective.

Let’s explore how you can leverage a working capital line of credit to power your business growth in the post-pandemic world.

Key Takeaways

  • A business line of credit provides flexible access to capital up to a preset limit. You pay interest only on what you use.
  • Working capital helps cover operating expenses like payroll, inventory and payments during slow periods.
  • Minimum eligibility requirements typically include 2+ years in business and $100K+ revenue.
  • Manage the line of credit strategically, only accessing what is absolutely needed and repaying quickly.
  • Good credit gets you better terms. Take steps to maintain a 80+ business credit score.
  • Compare lines of credit, business loans, factoring and other options to meet both short and long-term needs.

What is Working Capital and Why Do Businesses Need It?

Working capital refers to a company’s liquid assets – cash and assets that can be quickly converted into cash to fund day-to-day operations. It is calculated as current assets minus current liabilities. Working capital is essential for any business to pay bills, make payroll, procure inventory and cover other operating expenses.

Most small businesses need between 20,000 to 100,000 in working capital at any given time. However, working capital needs tend to fluctuate depending on the business cycle, seasonality, growth plans, and macroeconomic factors.

For example, retailers need extra working capital ahead of the holiday season to stock up on inventory.

Manufacturers may need more working capital if they get a huge new order. Restaurants need sufficient working capital during their busy season in the summer.

Revenue shortfalls, supply chain issues, changes in consumer demand, and deferred payments have put enormous strains on cash reserves. A recent survey found that 60% of small businesses have seen a drop in revenue due to the pandemic.

Most have less than 3 months of working capital buffer. Easy access to working capital financing is crucial for businesses to bridge income gaps and survive the ongoing volatility.

90% of small businesses are confident that they will still be in business a year from now, even if a recession occurs.Business Futures 2021: Signals of Change
Small businesses with high ESG performance have operating margins on average 3.7 times higher than those with lower ratings, as well as annual returns 2.6 times higher.Small Business In 2023: Experts Predict Trends And Challenges
Small businesses are focusing their efforts on marketing and promoting their businesses, investing in new technology, and boosting head count.Small Business In 2023: Experts Predict Trends And Challenges
Small businesses are becoming more “edge” organizations, where teams have autonomy to optimize local performance while still meeting corporate goals.The key market trends changing the ways businesses work
Small businesses are relying more on real-time data and AI to anticipate trends and inform decision-making.The key market trends changing the ways businesses work
Small businesses are building sustainability into everything they do, creating value for all stakeholders and attracting more customers.The key market trends changing the ways businesses work
Everyday Business Expenses
Everyday Business Expenses

Calculate Your Business’ Working Capital Requirements

To determine your business’s working capital needs, first, calculate your current level of working capital.

Working Capital = Current Assets – Current Liabilities

Current assets include cash, accounts receivable, inventory, and any other assets that can be converted into cash within a year.

Current liabilities include accounts payable, short-term debt, payroll taxes, credit card debt, and any other obligations due within a year.

Subtract your current liabilities from current assets to arrive at your net working capital position.

Next, consider factors such as:

  • Your monthly and annual expenses
  • Seasonal or cyclical fluctuations in business
  • Upcoming investments, expansions or pivots
  • Revenue volatility

Adequate working capital provides a buffer for unexpected expenses and downturns in cash flow. As a rule of thumb, most businesses should aim to maintain working capital equivalent to 3-6 months of operating expenses.

Use historical data, financial statements, business plans, and cash flow projections to arrive at your ideal working capital target. Online tools can also help determine your business needs.

How Can a Business Line of Credit Help Meet Working Capital Needs?

A business line of credit is a flexible financing option that provides access to cash as and when your business requires it. Here are some of its key benefits:

  • Funding on demand: With a line of credit, you can draw down funds as needed up to a pre-approved limit. This helps manage fluctuations in working capital.
  • Flexibility: You only pay interest on the amount utilized rather than the full amount. You can access more funds when needed.
  • Better terms: Lines of credit offer lower interest rates than credit cards or merchant cash advances.
  • Improved cash flow: Having readily available funds helps cover shortfalls and avoid missed payments.
  • Opportunity: Meeting short-term needs gives you more flexibility to invest in growth initiatives or pivot your model.

Banks typically offer secured lines of credit backed by business assets. Online lenders like Fundbox, Kabbage, and ROK Financial also offer unsecured lines of credit with quick approval times.

The most suitable option depends on your eligibility, desired loan amount, costs, and urgency of funds.

Business Goals
Business Goals

Business Working Capital Line of Credit: Qualify for Credit

When applying for a line of credit, lenders evaluate your business’ creditworthiness based on factors such as:

  • Time in business
  • Business credit score
  • Annual revenue
  • Cash flow
  • Existing debt obligations
  • Collateral (if secured line)

Minimum requirements may include 2+ years in business and $100,000+ in annual revenue. Stronger applicants may get higher approval limits and lower rates.

To improve your chances, do the following before applying:

  • Check your business credit score and address any reporting gaps or errors
  • Get your accounts receivable and finances in order to demonstrate the ability to manage credit
  • Reduce debt levels and maintain low credit utilization
  • Build credit history through business credit cards or small lines of credit
  • Have key documents ready, like business licenses, tax returns, bank statements

Getting approved for new financing is tougher for businesses impacted by COVID-19. Taking these proactive steps improves your appeal to lenders.

How Can You Strategically Use a Business Line of Credit?

If approved, avoid the temptation to draw down your entire line of credit right away. Here are some smart ways to use it:

  • Smooth cash flow: Use it to cover short-term gaps in income such as seasonal dips or client payment delays. This avoids falling behind on other obligations.
  • Seize opportunities: Have funds ready to quickly hire staff, ramp up marketing, or make other investments in growth when the timing is right.
  • Manage unexpected expenses: Be prepared to handle surprise capital needs like emergency repairs or replacing equipment without derailing operations.
  • Negotiate discounts: Having cash on hand puts you in a stronger position to negotiate discounts from vendors for early or bulk payments.
  • Optimize inventory: Maintain optimal inventory levels to meet customer demand while avoiding tying up too much capital.

In today’s uncertain climate, only draw down what you absolutely need and have a plan for timely repayment.

Prioritize using funds in ways that will strengthen your financial position.

I once worked with a growing company to secure a business working capital line of credit. After rigorous financial assessment and diligent planning, we found the right lender to provide them with the financial boost they needed. It was a rewarding experience, highlighting the vital role of brokers in helping businesses achieve their growth aspirations.

Access to Funds
Access to Funds

Best Practices For Managing a Business Line of Credit

Follow these tips to use your business line of credit strategically and effectively:

  • Link it to your checking account for easy access to transfer funds
  • Make purchases directly via checks or a linked card
  • Set up autopay for fixed monthly payments, keeping utilization low
  • Pay down balances quickly to free up credit for future needs
  • Watch utilization and avoid maxing out your credit limit
  • Review statements diligently to avoid fees and monitor the use
  • Have a repayment plan for larger draws, sticking to terms
  • Aim to use it short-term as a bridge during slow periods
  • Monitor credit score impact and maintain good business credit

Proper management keeps this financing reserve available for future needs.

Compare Business Line of Credit Options

Business lines of credit come in many shapes and sizes. Here is an overview of key product options:

Secured Lines of Credit

  • Issuer: Banks
  • Rates: 4-10% APR
  • Terms: 1-5 years
  • Limit: Up to $500K
  • Collateral required
  • Slower application and funding

Unsecured Lines of Credit

  • Issuer: Online lenders
  • Rates: 7-30% APR
  • Terms: 3-12 months
  • Limit: Up to $250K
  • No collateral
  • Faster funding

Business Credit Cards

  • Issuer: Major credit card companies
  • Rates: 12-29% APR
  • Revolving credit line
  • Individual cards have preset limits
  • Easy to qualify, use cards
  • High rates

Merchant Cash Advances

  • Issuer: Specialty finance companies
  • Rates: 1.1-1.4x amount borrowed
  • Terms: Daily repayments
  • Up to 12 months
  • Easy approval, quick funding
  • Very expensive way to borrow

Assess your eligibility and cost considerations to pick the working capital solution that best suits your needs and financial circumstances.

Peace of Mind
Peace of Mind

Benefits of a Working Capital Line of Credit

A working capital line of credit offers several advantages for businesses that need flexible and convenient access to funds. Some of the benefits are:

  • Flexibility: A line of credit allows the borrower to draw funds as needed, up to the available limit, without having to reapply for a new loan each time. The borrower can also repay the balance at any time, without any prepayment penalties or fees.
  • Convenience: A line of credit can be accessed quickly and easily, usually through an online platform or a debit card. The borrower does not have to wait for a loan approval or disbursement, which can take days or weeks for other types of financing.
  • Affordability: A line of credit typically has lower interest rates than other forms of short-term financing, such as credit cards or merchant cash advances. The borrower only pays interest on the amount drawn, not on the entire limit. Some lines of credit may also have lower fees or no fees at all, depending on the lender and the terms.
  • Credit building: A line of credit can help improve the borrower’s credit score and history, if used responsibly. By making timely payments and keeping the balance low, the borrower can demonstrate good financial management and increase their creditworthiness.

Drawbacks of a Working Capital Line of Credit

A working capital line of credit also has some potential disadvantages that businesses should be aware of. Some of the drawbacks are:

  • Variable interest rates: A line of credit usually has variable interest rates, which means they can change over time based on market conditions and the lender’s discretion. This can make it difficult to predict or budget for the cost of borrowing, especially if the rates increase significantly.
  • Collateral requirement: Some lenders may require collateral to secure a line of credit, such as inventory, accounts receivable, equipment, or real estate. This means that the borrower risks losing their assets if they default on the repayment. Collateral also limits the borrower’s ability to use or sell their assets for other purposes.
  • Qualification criteria: A line of credit may have stricter qualification criteria than other types of financing, such as credit score, revenue, profitability, cash flow, debt-to-capital ratio, and industry. Some lenders may also require a personal guarantee from the business owner or a co-signer, which means they are personally liable for the debt if the business fails to repay.
  • Revolving debt: A line of credit is a form of revolving debt, which means that the borrower can repeatedly borrow and repay funds within the limit. While this can be convenient and flexible, it can also lead to overborrowing and overspending, if not managed carefully. Revolving debt can also affect the borrower’s credit utilization ratio, which is the percentage of available credit that is used. A high credit utilization ratio can lower the borrower’s credit score and make it harder to qualify for other types of financing.

Types of Working Capital Lines of Credit

There are different types of working capital lines of credit available for businesses, depending on their needs and preferences. Some of the common types are:

  • Traditional line of credit: This is a standard line of credit offered by banks and other financial institutions. It usually has higher limits and lower interest rates than other types of lines of credit, but also stricter qualification criteria and collateral requirements. A traditional line of credit may also have an annual fee or a maintenance fee to keep the account open.
  • Online line of credit: This is a line of credit offered by online lenders, such as fintech companies or alternative lending platforms. It usually has lower limits and higher interest rates than traditional lines of credit, but also easier qualification criteria and no collateral requirements. An online line of credit may also have faster approval and disbursement times than traditional lines of credit, as well as more flexible repayment options.
  • Asset-based line of credit: This is a line of credit that is based on the value of the borrower’s assets, such as inventory, accounts receivable, or equipment. It usually has higher limits and lower interest rates than other types of lines of credit, but also requires the borrower to pledge their assets as collateral. An asset-based line of credit may also have periodic audits or inspections to verify the value and condition of the assets.
  • Invoice financing line of credit: This is a line of credit that is based on the value of the borrower’s unpaid invoices. It usually has lower limits and higher interest rates than other types of lines of credit, but also does not require collateral or affect the borrower’s credit score. An invoice financing line of credit may also have fees for each invoice that is financed, as well as for late payments or defaults.

How Can Better Credit Get You Better Financing Terms?

Your business credit scores and reports play a big role in determining both access to financing and the terms of credit. Businesses with higher credit scores can qualify for:

  • Larger lines of credit or loan amounts
  • Lower interest rates
  • Longer repayment terms
  • Less stringent collateral requirements

You can check your business credit reports from agencies like Experian, Equifax, and Dun & Bradstreet. Here are some tips to build strong business credit:

  • Maintain a good personal credit history
  • Separate business and personal finances
  • Open company credit cards and loans
  • Always pay bills on time
  • Reduce debt load before applying for new credit
  • Clear up any credit report discrepancies

Achieving an 80+ business credit score puts you in a much stronger position to qualify for the most affordable financing options.

Compare Business Line of Credit to Other Financing Options

While a line of credit offers many advantages, it is not necessarily the best solution for all situations. Here is how other common financing options compare:

Business Term Loans

Best for: Purchasing equipment, vehicles, real estate, or other long-term investments. Offers fixed regular payments.

SBA Loans

Best for: Long-term financing for major business expenses like real estate. Offers government guarantee.

Invoice Factoring

Best for: Immediate funding based on unpaid invoices to accommodate growing accounts receivable.

Business Cash Advance

Best for: Urgent cash flow crunches. Provides immediate funds without a fixed repayment schedule. Very high cost.

Equity Financing

Best for: Raising significant capital from investors in exchange for a stake in the business. No debt.

Assess your needs, eligibility, costs, and timeline to pick the right financing mix. Having a line of credit in place makes it easier to bridge unexpected short-term capital requirements.

Favorable Terms
Favorable Terms

How to Choose and Apply for a Business Working Capital Line of Credit

When it comes to choosing and applying for a business working capital line of credit, there are a few things I’ve learned from over 15 years in the business loan brokerage industry. First off, decide if you want a secured or unsecured line of credit. A secured one may require collateral, like your equipment, while an unsecured one might have higher interest rates. It’s a balancing act – choose wisely to suit your business needs.

Next, be ready for the eligibility criteria and application process. Different lenders have different requirements, from credit scores to business history. You’ll need documents to verify your identity and financial stability. Prepare these in advance, and make sure they’re spot on.

Finally, remember that a line of credit isn’t a free pass to splurge. It’s a loan with interest. Use it wisely, stay within your limit, and avoid late payments. It’s your key to managing cash flow, seizing opportunities, and overcoming challenges.

So, if you’re ready to unlock the potential of a business working capital line of credit, give me a call at 888-653-0124. I’ll be your guide through this financial journey, ensuring you make the right choices and enjoy the benefits without compromising your financial health.


For any business, the ability to access capital when you need it is critical, especially in uncertain times. A business line of credit enables you to strategically smooth cash flow gaps, take advantage of opportunities and manage unpredictable working capital needs.

While approval criteria are more stringent in the COVID era, taking proactive steps to shore up your finances, reduce debt, and build strong business credit will help qualify. Used prudently, a working capital line of credit provides an invaluable tool to stabilize and grow your business as the economy recovers.

Your business deserves to shine, and the business working capital line of credit is the spotlight it needs. Illuminate your financial path with us with a 1-minute application or call us at 888-653-0124 and let your business take center stage.

Gerry Stewart
Call to Learn More!