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Cash flow management is among the leading challenges for many companies – studies have shown that 82% of small businesses fail due to cash flow issues. In addition, according to CB Insights, 38% of businesses fail because they run out of cash.
The inability of a company to handle money effectively can lead to delayed payments to vendors, missed growth opportunities, and increased debt. Unfortunately, the lack of quick and easy access to funds is a common issue for many businesses.
Luckily, there are financial tools that you can use to your advantage to improve your cash flow management, handle operational expenses, and capitalize on potential market opportunities – such as the business operating line of credit.
In this article, we will discuss all the benefits of an operating line of credit and why it may be just what you need to take your business to the next level with peace of mind.
What Is an Operating Line of Credit?
An operating line of credit, also known as a business operating line of credit, is a flexible financing tool that gives you quick access to cash on an as-needed basis. It allows you to borrow up to a preset limit, repay the borrowed amount, and then borrow again as needed.
Lines of credit are an excellent tool for financing day-to-day operations, managing cash flow fluctuations, and addressing short-term financial needs. Unlike traditional term loans, which charge interest on the whole sum of the loan, interest is charged only on the used amount of the line of credit.
This means that you will have a cost-effective option for maintaining liquidity and supporting ongoing operational expenses without committing to long-term debt. Now, let’s take a look at the main benefits of an operating line of credit:
What Are The Benefits of an Operating Line of Credit?
If you are looking for a viable financial tool for managing operations and growth, you will be able to leverage the multiple benefits of an operating line of credit:
1. Flexible access to funds
Among the most essential benefits of an operating line of credit is the flexibility that it provides when it comes to accessing funds. You can draw funds from your line of credit whenever you need, up to the approved limit.
This allows you to get cash instantly without going through a new loan application process each time, which is especially valuable if you have to deal with unexpected expenses or take advantage of timely opportunities.
In addition, you have complete control over how much you borrow at any given time, and you only pay interest on the amount drawn (as opposed to the full amount in other financial tools such as term loans).
2. Interest on used funds, not the total credit limit
As we just mentioned, another key benefit of an operating line of credit is that you only pay interest on the amount of credit you are using – not on the entire credit limit available to your business.
For example, if you’ve been approved for a $100,000 line of credit, but you are only using $30,000, you will only be paying interest on the $30,000 utilized, not the full $100,000. This allows for more cost-effective financing as opposed to other types of loans.
The exact interest rate that you will be paying will depend on a variety of factors, such as:
- Credit score of the business
- Financial history
- Market conditions
- Type of credit line (secured vs unsecured)
- Amount of credit
As a general rule of thumb, it can vary anywhere from 4% to 15%
3. No need for reapplication
Once you’ve been approved for a certain amount of credit line, it remains available without the need to reapply each time you are drawing funds – which is among the most sought-after benefits of an operating line of credit.
In other words, you can draw funds, repay them, and draw again repeatedly without reapplying. The availability of funds revolves around repayments, keeping the line of credit open and accessible.
This flexibility allows you to save time and administrative effort instead of navigating repeated loan applications – every time you apply for a loan, costs such as fees for processing, underwriting, and credit checks can quickly pile up.
By getting a line of credit, you can meet your immediate business needs with higher operational agility.
4. Better cash flow management
Next on our list of key benefits of an operating line of credit is better cash flow management. A lot of businesses frequently face cash flow fluctuations due to seasonal sales patterns, delayed receivables, unexpected expenses, or irregular income periods.
An operating line of credit is a great way to cover operational costs during low revenue periods, respond to unexpected expenses in a timely manner, and avoid possible interruptions in day-to-day operations.
This tool smooths out your cash flow, helping you maintain stability, and reducing the financial strain on your business during periods of less revenue.
5. Safety net
Among the most underestimated benefits of an operating line of credit is its ability to act as a financial safety net. In fact, you can apply for a line of credit even if you don’t need it right away but want to have the peace of mind that you are able to face potential cash flow issues.
A business operating line of credit allows you to address your immediate needs without waiting for loan approvals, especially in unexpected situations such as emergency repairs, unforeseen cash flow shortages, and sudden opportunities that require quick investment.
Knowing that there is a financial buffer will allow you to focus on running and growing your business instead of worrying about potential financial issues.
6. Improved operational efficiency
Another benefit of an operating line of credit that you can leverage to your advantage as a growing business is to cover short-term operational expenses without depleting your cash reserves. This can include, but is not limited to:
- Inventory purchases
- Emergency expenses
- Supplier payments
- Office repairs
- Payroll financing
- Equipment purchases
- Operational expenses
- Marketing and advertising
- Capitalizing on opportunities
Enhancing operational efficiency will allow you to boost your business growth while saving time and money, as well as making better strategic decisions.
7. Credit building
If these benefits of an operating line of credit weren’t enough to convince you, here is another one – if you use this financial tool adequately, it can actually help to improve your business credit score.
How does this happen? On one hand, it demonstrates creditworthiness – if you are regularly using the line of credit and making timely payments, you are proving to the lender that you can manage your debt responsibly, which adds to your positive repayment history.
In addition, if you are maintaining a low utilization rate (below 30-40% of your limit), and making consistent payments, this will also impact your credit score positively.
Your responsible and effective use of the operating line of credit helps you establish a good track record of credit management, showing that you are a reliable borrower.
Last but not least, an operating line of credit also helps you prevent missed payments on other obligations, bridging cash flow gaps that could potentially harm its credit rating.
8. Strategic purchases
Next on our list of benefits of an operating line of credit is that this financial tool helps you take advantage of strategic purchasing opportunities by providing immediate access to funds.
This can include stocking up on inventory before peak or sales periods, purchasing materials or goods in bulk when prices are favorable, initiating new projects, and taking advantage of market fluctuations in order to reduce costs and maximize profit.
You can also leverage the benefit of enhanced negotiation power – with readily available funds; you can negotiate better terms, such as discounts for early or upfront payments. This allows you to strengthen your relationships with suppliers and enjoy better cost efficiency.
9. Support growth
To sum it up, a business operating line of credit supports growth by offering flexible access to funds, enabling businesses to invest in opportunities, expand operations, and manage cash flow effectively.
This financial tool allows for timely inventory purchases, marketing initiatives, and expansion projects without depleting cash reserves, facilitating strategic investments that drive business development and market competitiveness.
Considering all the benefits of an operating line of credit, it is not a surprise why many companies opt for this financial tool as a way to support and drive their business growth.
Applying for an Operating Line of Credit
If you are looking to leverage the benefits of an operating line of credit, look no further than National Business Capital. With a single application, you can get access to dozens of exclusive offers from +75 lenders so you can make the best decision for your business.
With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.
Are you ready to get started? Apply here.
Frequently Asked Questions
The main benefit of an operating line of credit is its flexibility. It provides businesses with immediate access to funds up to a certain limit, allowing them to manage cash flow, cover unexpected expenses, and seize growth opportunities without the need for constant reapplication.
Operating lines of credit can have higher interest rates compared to traditional term loans, especially if unsecured. Mismanagement can lead to chronic debt due to easy access to funds, potentially harming credit scores.
Additionally, some come with annual fees or require collateral, adding to the cost or risk for the business if unable to repay.
Whether a line of credit is better than a credit card depends on your needs. Lines of credit often offer lower interest rates and higher credit limits, ideal for larger, ongoing expenses.
Credit cards provide convenience and rewards for smaller, everyday purchases but typically have higher rates.
Yes, you can use a line of credit for everyday purchases, especially when it helps manage cash flow or leverage lower interest rates compared to credit cards.
However, it’s important to use it responsibly to avoid unnecessary debt accumulation and ensure the line remains available for significant financial needs or opportunities.
A term loan provides a lump sum of money upfront, which is repaid with interest over a fixed period. It’s suited for long-term investments. A line of credit offers flexible access to funds up to a certain limit, with interest charged only on the amount used.
It’s ideal for managing cash flow and short-term financial needs, offering repeated access without reapplying.
Secured lines of credit require collateral, such as property or inventory, which the lender can claim if the borrower defaults. This security often results in lower interest rates and higher credit limits due to reduced lender risk.
Unsecured lines of credit do not require collateral, making them more accessible but typically at higher interest rates and with lower credit limits, reflecting the increased risk to the lender.
Creditworthiness plays a crucial role in obtaining an unsecured line of credit.
ABOUT THE AUTHOR
Phil Fernandes serves as Chief Operating Officer for National Business Capital. He boasts 15 years of experience in sales and 10+ years of management experience as National’s VP of Financing/Analytics. Phil is also an excellent writer who's completed the Applied Business Analytics executive program at MIT and regularly contributes articles to National Business Capital’s blog.
