How Can a Working Capital Line of Credit Help Your Business?
Perhaps you’ve heard or even thought, “Short-term financing is only for startups or struggling businesses.” However, financing isn’t reserved for small businesses with poor financial health. In fact, a flexible funding solution, like a working capital line of credit, can be a key part of a business owner’s working capital management strategy.
Cash flow fluctuations are a natural part of business. When you have a plan in place for how you will preserve cash and cover your current liabilities, you’ll be better able to respond to changing business needs and growth opportunities.
Keep reading to get the ins and outs of working capital lines of credit, including what they are, how they work, and their top benefits.
What Is a Working Capital Line of Credit?
A working capital line of credit is a business line of credit that’s used to pay for operating expenses, such as:
Accounts payable
Payroll
Rent
Utility bills
As a flexible form of business financing, a working capital line of credit is ideal for covering operating costs during short-term cash flow gaps.
For example, let’s say you have outstanding accounts receivable that are due in 15 days. Until those are paid, your available cash reserves are low. However, you have two supplier invoices that are due in 10 days. You can use a working capital line of credit to cover those business expenses, and then when the accounts receivable funds come through, you’ll have the cash you need to make the repayments.
How Does a Working Capital Line of Credit Work?
With a working capital line of credit, you have access to a specific amount of money, known as your credit limit. You don’t receive the money in a lump sum like you would with a traditional term loan. Instead, you withdraw from the credit limit as you need it, and when you make repayments, the funds become available again.
For example, let’s say you have a credit limit of $150,000, and you withdraw $15,000 to cover your current working capital needs. You would still have $135,000 available for future withdrawals. A month later, you’ve repaid $2,500 and haven’t made any more withdrawals. That means you now have $137,500 available on your credit limit.
The interest also works differently than a term loan. With a term loan, you’d pay interest on the full amount of the loan. With a business line of credit, you only pay interest on the amounts you withdraw. In the example above, you’d pay interest on the $15,000 withdrawal, but not on the $135,000 that hasn’t been used.
Interest rates on a line of credit are usually variable, which means the rate can go up or down as market conditions change.
Business Credit Card vs. Business Line of Credit
Both business credit cards and business lines of credit are types of revolving credit and work similarly. However, the borrowing process is a little different.
With a credit card, you make direct payments from the funds you have available. With a business line of credit, you draw funds as you need them, and the money is deposited into your bank account. From there, you can use it to pay for your operating expenses.
Repayment terms can also differ. You’ll make monthly payments on a credit card, but a business line of credit can have either weekly or monthly repayments depending on the lender.
What Are the Benefits of Using a Business Line of Credit?
When compared to other financing options, business lines of credit have many benefits, especially when being used to support a business’s working capital. The top advantages include a quick application process, funds being readily available, and flexible terms.
Quick Application Process
If you’ve ever applied for a small business loan, you know the stringent eligibility requirements can lead to a lengthy application and approval process. However, with a business line of credit, you can apply, be approved, and receive funds much more quickly, especially when you work with an alternative lender.
Some online applications can take as little as three minutes. You may need to provide recent bank statements when you apply, but you generally won’t need a business plan, tax returns, or financial statements (e.g., profit and loss or balance sheets) like you would for a business loan from a traditional financial institution.
After you apply, your lender will generally review your credit score, monthly or annual revenue, and your years in business. You may be able to receive same-day or next-day approval.
On-Demand Funds When You Need Them
While term loans are great when you need a lump sum for a large equipment or real estate purchase, they aren’t the ideal solution for fluctuating working capital needs. You may end up borrowing too much or not enough.
Plus, some lenders place restrictions on how the money can be used. For example, an SBA 504 loan is meant for business growth and job creation, and it can’t be used for working capital or inventory.
With a revolving line of credit, you have a financing option that’s purpose-built for working capital. It’s there as a cash reserve, giving you peace of mind. Then, when you experience a cash flow gap, you can easily withdraw the exact amount you need and use it in any way you like.
Flexible Terms
There’s a lot of flexibility built into a working capital line of credit, especially when Backd is your lender.
For starters, Backd offers a revolving credit facility. This means you can keep using and reloading your credit through repayments as long as you need. Let’s say you have a $50,000 business line of credit and withdraw the full amount. Once you repay it, you’ll have that $50,000 available again. You can continue to repeat the process as often as you’d like.
A term loan doesn’t offer this kind of flexibility. When you borrow $50,000 from the bank and repay the loan, you’re done. If you need another $50,000, you’ll have to apply for a new loan.
Working capital lines of credit also offer better repayment terms. As we’ve mentioned, you only pay interest on the money you use, and you may be able to make weekly payments instead of monthly. The smaller, more frequent repayments can help with your cash flow management. Also, your credit limit will replenish more quickly.
Manage Your Working Capital With Flexible Financing
If your business experiences occasional cash flow gaps — whether from seasonality, delayed accounts receivable, or even investments in growth opportunities — a working capital line of credit can help you manage your operating expenses. It’s one of the most flexible business financing options, and the process is quick and easy. You can have the funds in hand in less time than it would take you to fill out a traditional term loan application.
Backd’s Business Line of Credit is available in amounts for $50,000-$750,000. You may be eligible if you have:
$100,000 in monthly revenue
A credit score of 650 or higher
Established business credit
A business that’s based in the U.S. with a brick-and-mortar address
Been in business for two years
The application only takes a few minutes, it won’t affect your credit score, and it’s obligation-free.
Apply now and receive a funding offer within as little as 6 hours.
