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By Heritage Bank on January 20, 2022
3 minute read

What Is a Small Business Line of Credit [And How Does It Work]?

Successful small business owners are generally adaptable by nature, so why shouldn’t they have flexible access to credit? If your business is growing or your cash flow is uneven, a line of credit offers the flexibility you need to succeed.

Term Loans vs. Business Lines of Credit

Term loans allow new businesses to get started and more established businesses to invest in long-term assets and revenue generators like new equipment, real estate or new product lines. If approved, you receive a lump sum disbursement and incur monthly payments. You also often need to provide collateral in the form of property, equipment or other valuables in the event you default on the loan.

Term loans are impractical ways to fund regular operational expenses like supplies, inventory or payroll, but many small businesses struggle with periodic or short-term cash flow issues. A line of credit ensures you can pay the bills necessary to run your business and maintain your credit rating despite fluctuations in revenue. 

Business lines of credit are generally unsecured, so no collateral is necessary to secure the funds. Also, you only draw out what you need as you need it and only incur interest on the portion withdrawn until you can repay the bank. Some businesspeople think of a line of credit as a credit card -- there’s a limit to available credit and you only incur interest for the credit you use.

Any business could benefit from a line of credit. If your business is seasonal, like a plant nursery, or cyclical, like a high-end car dealership, a business line of credit is a critical tool for managing cash flow.

Pros of Business Lines of Credit

More Flexibility - You only take out what you need and pay that amount back. If you don't need to borrow, the line remains open until you need it.

Easy Access - When you need to borrow, you can do so immediately without the delay of a loan application, credit check or approvals. 

Peace of Mind - If a machine breaks down, buying bulk now reduces your costs across several months or a large customer pays more than 30 days after invoicing, a line of credit is a buffer. You might also be better positioned to pursue unplanned opportunities to grow your business. For instance, a line of credit could help you increase inventory or production to meet a large order you might otherwise be forced to turn down. You might be able to purchase used equipment from a closing business to expand your production. 

May Improve Credit - If you borrow and pay back the money owed, avoid late fees, and keep your line of credit in good standing, you will establish better credit for your business. Good credit is essential if you try to open a larger line or credit, or if you do need to apply for a business loan in the future.

Cons of Business Lines of Credit

Easy Access - While a pro, it can also be a con if you aren’t disciplined about money management. Access to an open line of credit is not an excuse for impulse purchases. Just as consumers need to manage personal credit card debt, businesses need to manage lines of credit carefully and responsibly.

Lower Credit Limits: Depending on your business, you may discover that a line of credit isn't enough to cover long-term plans, including updating your equipment, expanding your location or adding more employees to your payroll. There is an overall limit to how much credit a bank can extend to your business, so if you have a line of credit, it will lower the amount you’ll qualify to borrow as a term loan.

Long Application Process: Applying for a business line of credit often takes as long or longer than applying for a fixed-term business loan. It also requires a lot of paperwork.

How Do I Open a Business Line of Credit?

The first step is meeting with an experienced commercial lender who can help you understand your options. Community banks like Heritage Bank are great places to find seasoned commercial lenders just one call or text away from a local decision maker. Larger banks often require navigating several layers of management, often working in other time zones, to secure credit.  

At Heritage Bank, we support small businesses and mid-size businesses across Cincinnati, Northern Kentucky and the Miami Valley with competitive lending products that support your needs today and long-term aspirations. We invite you to contact one of our experienced commercial loan officers today to get started. 

As one of the region’s leading community banks, Heritage Bank is committed to building up the businesses who operate in our region. Heritage Bank was founded by entrepreneurs and entrepreneurs still inspire our best banking.

Contact us today to learn how we can help!


Published by Heritage Bank January 20, 2022