Business Credit Center

Using a line of credit as working capital

Discover the different options you have when opening a line of credit for your business.

Published: May 08, 2017

Almost every business has times when it needs more cash than it has on hand. Many business owners will turn to their business or personal credit cards in these moments, financing cash advances or larger purchases with the intention of paying them off over several months. However, credit cards are best used for everyday spending that you intend to pay back quickly. Indeed, carrying a large credit card balance from month to month can add up in the long run – especially since most credit cards have a high interest rate on cash advances. In this situation, having a business line of credit already in place could give you a financial edge.

A line of credit lets your business tap into funds to bridge gaps in cash flow or expand your business. It can also help boost revenue by allowing you to finance new revenue streams instead of borrowing from your savings or turning business away. Applying for a line of credit before you need it gives you the flexibility to make the best decisions for your business at the right time, rather than letting a golden opportunity pass you by.

A business line of credit can be secured (i.e. you put up collateral) or unsecured. Both options involve an application, approval process, and borrowing contract, similar to a credit card. However, there are some important differences between these two types of borrowing:

Secured lines:

  • Require you to pledge assets, such as real estate or a savings or CD account, which can be used as a secondary source of repayment if you are unable to repay the amount borrowed

  • May offer lower interest rates than an unsecured account, depending on your specific business profile and your business and personal credit history; and real estate secured lines specifically may offer higher credit limits

  • Usually, real estate secured lines have a longer approval process, while savings and CD secured lines have a shorter approval process

Unsecured lines:

  • Let you borrow primarily based on your personal and business credit history, and cash flow

  • Typically have lower credit lines and may have higher interest rates than secured accounts

  • Typically have a longer approval process than savings and CD secured lines

Your business needs, as well as your spending strategy, will determine which type of credit line is best for you. We have customers who regularly draw against their full credit line and then pay back the full amount soon thereafter. Others make less frequent draws and pay down their balance over the course of a few months.

Here are some examples of how small business owners have used Wells Fargo lines of credit in the past:

  • A signage store earned a substantial discount by purchasing a large quantity of vinyl at one time.

  • A coat maker received an order for hundreds of coats from a large department store and used the line of credit to purchase enough material to make the coats.

  • A landscaper used a line of credit to cover basic business expenses – such as taxes, payroll, rent, and insurance – while waiting for clients to submit payment.

However, lines of credit aren't ideal for every borrowing situation. If you're planning to make a large purchase that you want to pay down in equal monthly installments over time, a loan may be a better option. For example, if you're expanding your commercial space or purchasing a large piece of equipment, a loan may offer you the security of knowing exactly how much you'll need to pay each month for a certain period of time.

In addition, business credit cards may be more appropriate for everyday purchases you pay off each month. By using credit cards for smaller purchases and paying them off each month, you can take advantage of the interest grace period and avoid paying interest. For a line of credit, interest begins to accrue immediately after you borrow against the line.

Lines of credit can help you cover unexpected costs, but it's also important to plan ahead to help avoid surprises by projecting cash inflows and outflows. By planning ahead, you can predict when you'll need to draw on your line of credit, how much you'll need to cover, and when you'll be able to pay it back.

A business line of credit can be a valuable tool that gives you more control over cash flow. Whether you're planning ahead for sales growth or bridging the gap between accounts payable and customer payments, lines of credit provide a predictable, flexible source of funds that can keep your finances strong and your business growing.