Understanding Lines of Credit to Maximize Business Growth

Matt DeBernardo

Last Modified : Mar 19, 2024

Reviewed by: Bruce Sayer

In the evolving landscape of business finance, lines of credit stand out as a versatile tool for companies looking to navigate the ebb and flow of operational needs and growth opportunities. As a financial expert, I’ve witnessed countless businesses harness the power of various lines of credit to maintain liquidity, manage cash flow, and strategically invest in their futures. Here’s a detailed look at the types of lines of credit available to businesses and how they can be effectively utilized.

1. Revolving Lines of Credit

A revolving line of credit is a flexible financing option that allows businesses to borrow up to a predetermined limit, pay off the balance, and borrow again. It’s akin to having a continuous loan that you can tap into whenever necessary, without reapplying each time. The key feature is its revolving nature, where the credit becomes available again after repayments are made, making it ideal for managing cash flow fluctuations and unexpected expenses.

Strategic Use:

• Cash Flow Management: Use it to smooth out seasonal dips in revenue.
• Emergency Funds: Keep it as a safety net for unforeseen expenses.

2. Non-Revolving Lines of Credit

Unlike their revolving counterparts, non-revolving lines of credit do not replenish after payments are made. Once the credit limit is reached or the term ends, the account is closed. This type of credit is suitable for funding specific, one-time projects or purchases where the total cost is known upfront.

Strategic Use:

• Project Financing: Ideal for funding a specific expansion project or purchasing new equipment.
• Budgeted Purchases: Use it for planned expenditures that fall outside normal operations.

Difference between a Non-revolving Line of Credit and a Term Loan

When discussing non-revolving lines of credit, I’m often asked, what’s the difference between a non-revolving line of credit and a term loan? A non-revolving line of credit and a term loan are both financing options available to businesses and individuals, but they serve different purposes and have distinct features:

• Funds Accessibility: A non-revolving line of credit offers flexible access to funds up to the credit limit, while a term loan provides a lump sum of money upfront.
• Repayment and Reuse: Funds from a non-revolving line of credit cannot be accessed again once repaid, whereas a term loan does not offer further funds once it’s disbursed.
• Interest Charges: With a non-revolving line of credit, interest is generally charged only on the amount drawn. For term loans, interest is charged on the entire loan amount from the outset.
• Purpose and Flexibility: Non-revolving lines of credit offer more flexibility for varying financing needs up to the credit limit, while term loans are typically used for specific, significant investments with known costs.

3. Secured Lines of Credit

Secured lines of credit, also known as asset-based lines of credit, require collateral, such as real estate, inventory, or receivables, to back the loan. Because the lender has a claim on assets in case of default, these lines typically come with lower interest rates and higher credit limits. They’re a good fit for businesses that have significant assets and are looking to minimize borrowing costs.

Strategic Use:

• Leveraging Assets: Convert idle assets into working capital.
• Cost-Effective Borrowing: Take advantage of lower interest rates for larger investments.

4. Unsecured Lines of Credit

Unsecured lines of credit do not require collateral, making them a faster and more accessible option for businesses without significant assets. However, they usually come with higher interest rates and lower credit limits due to the increased risk for lenders.

Strategic Use:

• Quick Access to Funds: Ideal for businesses needing immediate liquidity.
• Operational Investments: Suitable for short-term operational needs like inventory purchases or marketing campaigns.

5. Business Credit Cards

While not traditionally categorized as lines of credit, business credit cards function similarly by offering a credit limit that businesses can borrow against. They come with the added benefits of convenience, rewards programs, and expense tracking tools.

Strategic Use:

• Expense Management: Simplify purchasing and tracking of everyday expenses.
• Rewards and Perks: Leverage rewards for travel, cash back, or business services.

6. Demand Lines of Credit

This type of credit allows borrowing up to a certain limit at any time, but the lender has the right to demand repayment at any moment. It offers flexibility for the borrower, but with less stability compared to other lines of credit. Demand lines of credit can be either revolving or non-revolving.

The demand feature introduces an element of risk for the borrower, as they must be prepared to repay the loan potentially at short notice. This type of credit facility is often used in situations where the lender wants to retain more control over the loan due to concerns about the borrower’s financial stability or other risk factors.

Strategic Use:

• Build Credit: For newer businesses or those looking to build or improve their credit history, responsibly managing a demand line of credit—regularly borrowing and repaying—can demonstrate fiscal responsibility.
• Rewards and Perks: When a time-sensitive business opportunity arises, such as a favorable purchase order or a discount on bulk inventory, a demand line of credit allows businesses to act quickly.

Leveraging Lines of Credit for Your Business

Effectively leveraging a line of credit requires a clear understanding of your business’s financial needs and strategic goals. Here are a few tips:

• Assess Your Needs: Determine whether your financial requirements are short-term or ongoing, and choose between revolving and non-revolving options accordingly.
• Consider the Cost: Compare interest rates, fees, and terms to find the most cost-effective option.
• Plan for Repayment: Ensure your business cash flow can comfortably cover repayments to avoid straining your finances.

Conclusion

Lines of credit offer businesses a flexible and strategic tool for financial management and growth. By understanding the different types available and how they can be utilized, business owners can make informed decisions to support their operational and expansion goals, ensuring they have the capital necessary to thrive in any economic environment.

Matt DeBernardo

Matt DeBernardo, SVP, Business Development Officer, is an accomplished finance professional with over 15 years of experience in alternative finance. In his role, he is responsible for structuring creative, flexible asset-based lending solutions that maximize working capital.

Prior to joining eCapital, Matt held senior positions at Alterna Capital and LSQ, where he was a top producer. His commitment to the alternative finance industry is evident in his active participation in the Secured Finance Network as a board member for the Florida chapter, and a member of many other industry organizations such as the Association for Corporate Growth and the Turnaround Management Association.

Matt earned a Bachelor of Science degree (honors) in Finance from Bentley University and is a graduate of the General Electric Financial Management Program.