Is it time to get an operating line of credit for your business?

If you run a business and need extra working capital, or if you’ve been looking for short-term financing, consider a business line of credit. You can use this form of revolving credit when you need help meeting your goals, whether that’s cash flow management, topping up your inventory or taking advantage of a growth opportunity.

A line of credit is a flexible loan with a set credit limit, similar to a credit card. You can access as much money as you need, when you need it, up to that limit. For example, if you need money for a short-term expense, you can borrow the amount you need and pay down your balance at any time. Interest starts accumulating on the amount you borrow as soon as you borrow it and it is reduced as you pay it down—to zero when completely paid off.

“A business line of credit can help companies with operational expenses, such as payroll and inventory, or to help grow the business. It can be especially useful for small or cyclical businesses to fill cash voids or cover unexpected expenses,” says Martin Petras, Associate Director, Commercial Real Estate and Syndications, at ACU’s Business Financial Centre.

In addition, a business line of credit can be secured or unsecured. A secured business line of credit requires a form of collateral, which means you’ll typically get better loan terms, such as a lower interest rate. An unsecured business line of credit doesn’t require collateral to secure the loan, but you can expect to pay a higher interest rate on the money you borrow. Unsecured lines of credit are much harder to procure, as they have a higher risk associated with them. They require higher due diligence, and typically result in lower amounts being approved.

The benefits of a business line of credit

While plenty of financing options are available—like term loans, invoice factoring and business credit cards—a business line of credit has several benefits.

Improved cash flow: A revolving line of credit means you have a pool of funds available to you before you actually need the money. If you don’t need it, you don’t touch it—and you don’t pay any interest on it. Unlike a traditional loan, you can access cash on demand whenever you need it.

Flexibility: A business line of credit has many uses, from covering payroll needs to helping with unexpected shortfalls or business expenses. It also offers flexibility when it comes to payment terms. Unlike traditional loans, which have set monthly payments, a revolving credit line is more flexible, which is particularly handy for cyclical businesses or start-ups.

Building a relationship with your lender: Just like individuals need to establish creditworthiness, businesses must also build a positive payment history to help obtain future credit (or even renew your line of credit). When used responsibly, a business line of credit can help establish your company’s credit score and may even help you qualify for better loan terms.

Potential drawbacks and risks

Like any type of loan, a business line of credit has pros and cons including drawbacks and risks to consider. In some cases, a different type of loan may be a better fit for your needs.

For example, it may have a higher interest rate than a traditional business loan. The interest is usually at a variable rate, which can make it harder to budget for. There may be additional fees, depending on the line of credit—but don’t worry, we’ll make sure you’re aware of everything so you’re not caught off guard.

Ultimately, a business line of credit should be used wisely—primarily for shorter-term variable things like operating expenses and inventory.
“It’s important to use your credit line within the time frame to ensure it remains revolving,” says Palwinder Singh, Commercial Account Manager, Small Business Specialist, with ACU’s Community Financial Centre. “Avoid buying fixed assets with longer-term returns on a revolving line of credit.”

There’s no fixed time frame for utilizing a line of credit (LOC), it’s important the credit line operates within its intended revolving structure. This means you should draw from and repay the credit line regularly, ensuring it revolves fully as per the agreed terms.

Benefits of ACU’s business line of credit

ACU’s Business Financial Centre (BFC) offers guidance and advice that supports the growth and financial health of businesses in Manitoba. With the BFC, you get a local, dedicated account manager who can help with customized business chequing accounts, deposit strategies, commercial mortgages, construction financing, bridge financing, term loans and operating lines of credit.

There’s no time frame to use the LOC, however, it should revolve fully. Financial institutions regularly evaluate LOCs to make sure they’re the right fit for the organization. If it’s not revolving, the financial institution may suggest terming out the portion that’s not revolving.

Our Community Financial Centre (CFC) helps small businesses, start-ups, non-profits, co-ops and social enterprises with specialized, personalized support. The CFC team understands the unique challenges those types of organizations face when trying to access capital.

The process to determine potential lending opportunities is multi-layered and unique to every situation. Since each business has its own unique structures and differences, ACU commercial account managers look at all credit proposals on the basis of their merits: it’s not a cookie-cutter approach.

“At ACU, we offer a business line of credit tailored to your business cycle and industry-specific needs. It seamlessly integrates with the requirements of your sector, providing optimal support for your goals,” says Palwinder. “The first and most important aspect is getting to know you as a borrower and understanding your financial statements.”

Explore how a line of credit can benefit your business and help it grow.

Book an appointment with our advisors today.

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