Orders are coming in, and clients owe you money. Things are going great. But wait! You’ve got to shell out wages and expenses before you get paid. Your employees and vendors don’t care that someone owes you money. They want theirs now. What can you do?

Wouldn’t it be nice to have a cushion of money to fall back on? Wouldn’t a cash reserve you could tap into when you really needed it be a true business blessing? You may need a business line of credit.

Why Would You Need a Business Line of Credit

A line of credit is your life line. This can be is especially true in the following cases:

  • If your business is seasonal, it can tide you over in the lean months.
  • If you need to buy more inventory for greater revenues, it can get you there. The gap of time between purchasing inventory and being repaid, can be a hardship for some businesses.
  • If you need to expand your facilities towards greater profits, you can win with a business credit line.
  • If you find yourself running into monthly cash shortages that is later remedied when invoices are paid.

Whatever the reason, a business line of credit is a very useful and strategic tool. Planning ahead to have credit available when you need it, can also save a great deal of stress in times when you could find yourself in a financial crunch. Though your cash flow may be smooth today, it could be harmful to find yourself unable to pay employees or vendors a few months down the line when there’s not enough saved in the bank. An uninterrupted supply of capital can help your business to run smoothly without the damage that unintended cash flow problems can cause.

Loans vs Business Line of Credit

You can think of a business line of credit as a personal credit card for your business. A bank gives you access to a set amount of financing (we’ll use $25,000). Like a credit card, when you use $5,000 you only pay interest on that amount, not the full $25,000. Until the $5,000 is paid off you still have the $20,000 cushion to use. Once the $5,000 is repaid your reserve is back to $25,000.

Unlike a standard business loan you don’t have to reapply once it is paid down to zero. A business line of credit is “revolving,” meaning you can use it over and over again (as long as you stay current on any payments owed.) (Read more on the difference between loans & business credit here.) Keep in mind, that interest rates are typically more favorable with a loan. But business lines of credit can be an excellent option for emergency money that’s available “just in case.” Also, business lines of credit don’t require monthly payments unless you use it. Why pay interest on money that isn’t being used?

Personal Credit vs Business Credit

A business line of credit is superior to a personal credit card in several ways.

  • Credit cards usually have higher interest rates, and assess extra fees for cash advances.
  • While credit cards require monthly payments, not all lines of credit do so.
  • Business lines of credit also help separate the business credit from the owner’s personal credit. This allows the business to build its own credit profile, which offers many advantages.

For more information on this strategy see my book, Finance Your Own Business.

Remember to save yourself the cost of a credit card’s higher rates and hefty fees. Loans and business credit terms are often more favorable.

When to Avoid a Business Line of Credit

Do NOT use Business Credit to bail out a business undergoing a serious ongoing financial crisis. It’s best to use business lines of credit smooth the gaps in cash flow and tide the business over until accounts receivables come in. Lines of credit are designed to be spent as needed, paid off, then used again as necessary.

When to Use Business Lines of Credit

Good reasons to use business credit can be short-term working capital needs such as:

  • Inventory purchases
  • Future project costs
  • Company payroll
  • Hiring additional staff to accommodate a sales spike
  • Funding responsible growth

Sometimes businesses just need more of a cushion to expand their working capital.

Small Business Financing Resources:

When it comes to your small business, it’s hard to know who to trust. The following resources can help your business grow. Note: We are an affiliate of some companies we feature. Keep in mind, though, your business success it always our top priority. Here is full list of more than 29 financial resources.

Get a free business and personal credit score summary and score. No credit card required. Easy to use and valuable insights all in one spot.

Authorize.Net enables merchants to authorize, settle and manage credit card and electronic check transactions via Web sites, retail stores, mail order/telephone order (MOTO) call centers and mobile devices.

Fundera is the safe, friendly, and free way to find your lowest rates on small business loans, guaranteed.

Kabbage gives you the security of working capital whenever you need it.

OnDeck delivers true small business loans using our OnDeck Score™ technology, which focuses on the health of your business – not your personal credit score. To get the offer, please type MRP-CRP-001 in the form field listed as Partner ID.

Learn More About Business Lines of Credit

Finance Your Own Business

Our upcoming book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.

Fill out the form on this page and we will let you know when the new book is released and offer early bird discounts. Plus you’ll get a free guide today – The Levels of Business Credit. (And don’t worry: we know you’re busy so we won’t flood you with email.)

About the Authors

Garrett Sutton, Corporate Attorney & Author

Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.


Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.