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A business line of credit (BLOC) is a business loan that allows the borrower to access funds up to a predetermined amount as needed. This loan offers various types of repayment plans available to pay back the borrowed money, along with interest charges.
Similar to a credit card, businesses can draw any amount below their limit, and pay it back at any time (usually without early payment fees). But unlike a credit card, BLOCs traditionally have lower interest rates and higher cash withdrawal limits.
But it’s not always clear when different types of lending should be used. Here are some examples of when a BLOC would be beneficial.
1. Smooth Out Cash Flow Disruptions
When vendors or suppliers want up-front payments while customers want businesses to extend credit to their purchases, this can cause disruptions in your business cash flow. Fortunately, a BLOC can fill that gap. With typically lower interest rates than a credit card, expenses that may need to roll over a month or two will cost less, and a line of credit can help ensure you have the cash on hand when you need it.
2. Stock Up on Inventory and Supplies
Especially with tourism- or holiday-related businesses, seasonality can have a significant impact on profitability. Ahead of major events like the Made in Hawaii or Merrie Monarch festival, stocking up on supplies and inventory months ahead can drain cash on hand. With a BLOC, you can access the goods you need ahead of a busy season, ensuring you can meet customer demand while maintaining cash flows.
3. Make Payroll While Waiting for Receivables
A reliable payroll is a cornerstone of employee trust and retention, and a customer missing a payment could mean staff disruptions that are hard to recover from. When a business’ greatest asset is its employees, a BLOC can cover payroll costs while you wait to receive payments from customers. Once payments catch up, you can pay down your line of credit and have it ready in the event of future business disruptions.
4. Cover Unexpected Costs or Necessary Repairs
Even the best laid plans can’t predict every uncertainty, and when a truck unexpectedly breaks down, or a key supplier suddenly goes out of business, having the cash available to cover the unexpected expense can be the difference between a business surviving or not. A BLOC can help weather those expenses.
5. Bridge Cost Gaps in an Expansion
While a traditional business expansion can be funded using a business term loan, or other types of fixed lending, cost overruns or changes in scope may leave those plans without the funds to see them through. Rather than delay completion, or worse – cancelling the project altogether – a BLOC can help bridge the gap between traditional fixed lending and project completion.
No matter how you use a credit line, it’s important to remember responsible borrowing practices. Debt can be useful, and even the most effective, way to finance expenses, but over-reliance without proper financial cushions can result in business failure. If you’re not sure about the best course of action, be sure to consult with a financial specialist to determine the best course of action.
Tip:
Use the calculator below to see the payment and interest differences between a business loan and a business line of credit. Business Loan or Line of Credit Calculator
A BLOC can be a great way to cover short-term expenses or respond to situations requiring cash you may not immediately have on hand otherwise. With traditionally lower rates than credit cards and the ability to directly pull cash without paying cash advance fees, credit lines provide your business with amounts similar to business loans, while maintaining the flexibility of a credit card.
