Should I use a line of credit for business working capital?

Getting caught in a cash flow crunch is an all-too-common headache for even the most successful small business owners. It’s the reason why 29% of startups fail, the second most common cause behind “no market for the product,” according to research by CB Insights. Even profitable small businesses that don’t have a substantial cash cushion can meet this unfortunate fate.

There are multiple options for averting a cash crisis, but all are definitely not equal. For example, it’s tempting for owners to whip out a business credit card (or even a personal card) for a cash advance or to cover an unexpected expense. Viewed as a very short-term boost, the quick credit card solution comes with earnest plans to pay it off just as quick, in a month or two, max.

So often though, the best laid plans go awry and suddenly the hole is getting deeper, at the rate of 23.53% annually on average for cash advances, with some interest rates topping 30%, according to Cash advances aside, even credit card interest rates on regular purchases are well into double digits. Tony Soprano would be envious.

By contrast, a small-business line of credit provides short-term liquidity for seasonal cash flow demands and other short-term needs without the sky high interest rates. Plus, your minimum monthly payments are often interest-only for an extended period of time. Other benefits include:

There when you need it — Your line of credit is a revolver that provides maximum flexibility and is always ready in an emergency. Establish the line in advance and draw down only when you have to.

Builds your business credit history — Using a line of credit can establish a positive payment track record that will help you qualify for future business expansion loans.

Lines of credit can be either secured or unsecured. Secured lines require you to use assets as collateral against the line. They often have lower interest rates than an unsecured account, especially if your business does not have much credit history.

At Litchfield Bancorp, we also offer lines of credit guaranteed through the Small Business Administration, including the SBA “Low-Doc” program, which requires minimal documentation and the Connecticut Development Authority Preferred Lender Program. 

Contact me today to get started.

Margret Warner
Vice President, Commercial Lending
Litchfield Bancorp

Author: Margret Warner

Margret Warner started her career at Litchfield Bancorp in 2000 as Branch Manager in Washington Depot and has subsequently served as Branch Manager of the Litchfield office, Business Development Officer and is currently a Commercial Lender based in the Watertown market. With over 25 years of banking experience, Margret brings her extensive knowledge of the financial services industry to area businesses. Margret resides in Torrington and is committed to the communities where she works and lives as a member of the Watertown Rotary and advisor of Leadership NW. In addition, she serves on the board of the Watertown/Oakville Chamber, the United Way of Northwest Connecticut, VNA Northwest, Inc., and the NW CT Chamber of Commerce. She is a graduate of the esteemed ABA Stonier Graduate School of Banking, and holds a BBA in Accounting from Hofstra University.