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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
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