To get a business off the ground and running, you often need seed capital to fund startup costs. Likewise, once operations are in full swing, you may require financing to fuel future growth. A business line of credit is a powerful and flexible financing tool that gives you the freedom to access funds on your terms.
Important Note: Business lines of credit are typically available to businesses with a proven operating history. If your business is brand new or pre-revenue, you may not yet qualify for a line of credit and should consider alternative financing options such as SBA microloans, business credit cards, or personal investment.
Riverview Bank provides a suite of services for your commercial banking needs. Here are some strategies for using a business line of credit effectively, so you can maximize its value and drive sustainable business growth.
Review the Terms
Knowledge is power, so empower yourself to make informed financial decisions by understanding the costs, terms, and obligations associated with your business line of credit.
For example, lines of credit come with what’s known as a draw period. During the draw period, you’ll have a designated timeframe—typically several years—to access and borrow funds.
One key distinction between a business line of credit and a traditional loan is that, during the active draw period, you’re only responsible for paying interest on the funds you actually use. You can also draw from the line multiple times, as long as there are funds available.
Once the draw period is up, the repayment period begins. At this point, you will start making monthly payments of principal plus interest. The length of the draw and repayment periods vary, so check with each lender to see what options they offer.
Tip: Before applying, it’s important to understand what lenders typically look for. This includes two to three years of business operating history, consistent revenue, strong credit, and sometimes collateral. If you’re a newer business, ask your banker about other short-term funding options until you meet these qualifications.
You should also ask what fees, if any, are associated with your business line of credit. For example, there may be an origination fee or draw fees each time you borrow against the line. You may incur a prepayment penalty should you pay down the balance before the end of the repayment period. Be sure to find out whether your lender charges this fee.
As with any loan, it’s important to shop around and compare offers from different lenders. Business lines of credit often come with variable interest rates, so be sure to understand how the annual percentage rate (APR) is calculated. Then carefully review the loan terms to identify the most competitive offer.
Being more informed will help you make a decision that’s better aligned with your business interests.
Plan for Short-Term Needs
Since business lines of credit often have shorter repayment periods than business loans, they’re better suited for financing your short-term needs. Creating a targeted plan for how you’ll use your line of credit can help you maximize your draw period and borrow more strategically.
Examples of smart use cases include:
- Covering payroll or vendor payments during seasonal slowdowns
- Purchasing inventory in advance of peak periods
- Bridging short-term cash flow gaps from unpaid receivables
- Taking advantage of early-pay discounts with suppliers
A business line of credit functions much like a credit card but typically comes with a lower interest rate. When you borrow on a credit card, you’re able to avoid paying interest if you pay your bill in full at the end of the month. Similarly, if you can repay the balance on your line of credit quickly, you’ll reduce the total interest paid, making it an excellent option for business owners with short-term financing needs.
As a business owner, you likely recognize the value of having a strategic plan in place. Take the time to do your research and consult with your lender to determine if a business line of credit is the right financial solution for your specific needs.
Avoid Using LOCs for Long-Term Investments
Business lines of credit are not designed for long-term purchases, such as equipment, real estate, or facility upgrades. These uses may exceed the repayment term and lead to higher interest costs. For longer-term needs, explore SBA loans or fixed-term financing options.
Monitor Cash Flow
As with any type of financing, it’s essential to borrow responsibly. Keep track of your cash flow so that you know you have funds available to pay back the principal plus interest during the repayment period. For example, treasury management services can help ensure you have an adequate amount of cash reserves while optimizing your investment returns.
While you will have access to the full balance of your line of credit, it’s wise to only borrow what you truly need. Aim to keep your credit utilization ratio (the amount you’ve borrowed compared to your total available credit) at or around 30 percent to maintain a solid credit score.
Effective cash flow management and strategic spending can help secure long-term financial stability and foster sustainable growth.
Craft a Repayment Strategy
A line of credit is unique because, unlike a loan, it doesn’t come with a set repayment schedule. Your monthly payment on a line of credit depends on several factors, including the current interest rate, whether you are in the draw or repayment period, and how much you ultimately borrow.
To set yourself up for success, craft a repayment strategy that takes into account both the low and high end of what you may need to repay. Then ensure you have adequate cash flow to pay back the full balance during the repayment term.
You can meet with a financial planner or use a repayment calculator to get a better idea of your estimated monthly payments. Maintaining strong repayment habits could potentially boost your credit score and put you in a better position to obtain competitive financing down the line.
You may also want to set up automated payments to help avoid any late fees. Once it’s set up, you can simply set it and forget it.
Apply for a Business Line of Credit from Riverview Bank
A business line of credit isn’t simply an attractive financing option—it’s a strategic asset.
Ready to find out whether it’s the right financial tool for you? If so, get in touch with one of our Business Banking Relationship Managers.
The Riverview Bank team is dedicated to supporting you at every stage of your journey. Whether you’re just starting out or scaling your business to new heights, we’re just as invested in your success as you are.
So, let’s take the next steps together. With our support, your ambition, and a clear vision, there’s no limit to what you can achieve—both now and in the future.