What's a Business Line of Credit and How Can It Help?

A bakery owner after two years of consistent efforts has secured a loyal customer base. Suddenly, a large corporate client approaches them to cater to their monthly events. On the surface this is an excellent deal for the owner. But the catch here is the owner has to upgrade his existing kitchen infrastructure and source bulk supplies, existing cash reserves fail to cover the upcoming costs. This is where a business line of credit can cover this immediate expense.

For many family-run enterprises with minuscule profit margins and revenue, this is a common phenomenon. They resort to a smaller business line of credit to counter minor hiccups caused by unforeseen circumstances. According to a study by Small Biz Genius and Fundera, 29% of small businesses fail to close down as they exhaust their cash reserves.

A business line of credit for new businesses has proven itself to be a vital asset in its early years. A prominent example of this is OYO, which was established in 2013. It required significant capital to scale and leverage credit facilities from Indian banks and financial institutions; this was vital for them in managing their operational expenses and sustaining cash flow. The versatility of a secured or unsecured business line of credit allows the client to borrow and repay funds as needed. Though this financial instrument has numerous benefits, the following applications have permitted businesses to prolong their existence and stay relevant in the hyper-competitive market.

Managing Cash Flow Gaps

Cash flow challenges are a common hurdle for small businesses, especially in industries with seasonal fluctuations. According to a 2023 survey by QuickBooks, nearly 60% of small businesses experience cash flow issues annually. For example, a retail store might face a cash crunch after purchasing inventory for the holiday season but before seeing sales revenue roll in.

A small business line of credit provides the financial cushion to bridge these gaps. It allows businesses to cover payroll, utilities, and other operational expenses without disrupting daily operations.

According to a disclosure by the U.S. Treasury’s Small Business Administration (SBA), Kanye West’s Yeezy secured a PPP Loan ranging from $2M to $5M. Due to its owner's stature, the company was not perceived as a small business. The report detailed how the loan was used to save 106 jobs and keep the company’s operations afloat during the initial impact of the pandemic.

“Never take your eyes off the cash flow because it’s the lifeblood of business”, Sir Richard Branson, business magnate, investor, author, and philanthropist.

Capitalizing on Growth Opportunities

It is often said that opportunity doesn’t knock twice. It is best to make the most of it when it is in front of you. Businesses often come across external economic factors that would allow them to expand their operations for guaranteed future profitable quarters. Be it expansion, launching of new products, or securing a lucrative contract, immediate growth mandates immediate capital.

Under Armour had a line of credit with JP Morgan Chase worth $800M. This line of credit has consistently allowed the brand to reinvest their profits into product developments and marketing and become a powerhouse in the global sporting industry with billions of revenue generated annually.

For early-stage startups, securing a business line of credit for new business ventures can provide the flexibility needed to act swiftly on growth opportunities. According to the Federal Reserve’s Small Business Credit Survey, nearly 48% of businesses that received credit used it to support expansion efforts.

“It's through curiosity and looking at opportunities in new ways that we've always mapped our path.”, Michael Dell, founder of Dell Computers.

Handling Unexpected Expenses

Unexpected expenses, ranging from simple equipment failures to massive economic downturns, can flip any business upside down and cripple its financial stability. According to JP Morgan Chase, the average small business has only 27 days’ worth of cash reserves. An unsecured business line of credit offers a safety net without requiring collateral, making it a practical solution for navigating unforeseen challenges.

A prominent example of this is Nintendo, with its 135 year history it has a track record of ground breaking success and catastrophic failures. 2013 was a turbulent year where the company had considered layoffs owing to the loss of its Wii-U console. This led to the then CEO Satoru Iwata to take a 50% pay cut to retain talent and exhausting the company’s credit options until they succeeded with the 2017 Nintendo switch console.

“In business, what's dangerous is not to evolve.” Jeff Bezos, Founder of Amazon

A business line of credit is a powerful financial tool that offers flexibility, security, and growth potential for businesses of all sizes. Whether you’re a startup needing a business line of credit for new business ventures or an established company seeking to optimize cash flow, a LOC can provide the liquidity to achieve your goals. By understanding the requirements, evaluating options, and using credit responsibly, you can unlock opportunities and build a resilient financial foundation for your business.