When a Small Business Line of Credit is the Right Funding Choice

If you’re considering applying for funding for your business, a small business line of credit or ‘LOC’ can be ideal if you want short-term revolving funds to improve or address cash flow issues. A line of credit gives your business access to money when you need it most. Unlike a term loan—where money is deposited into your account and you repay principal and interest from day one—a line of credit is a pre-approved amount of money available for your business needs when you want to use it and you only pay for what you use. Lines of credit, therefore, can provide peace of mind as a safety net available for any unexpected expenses.

How a small business line of credit works

First, determine how much you need in your line of credit and talk to a TD Small Business specialist. For this example, we'll use $50,000. If approved, this money sits dormant in the bank (for a small yearly fee) until you need it. You only pay interest on what you use, not the whole amount. If you access $10,000 from your line of credit to cover a cash flow shortage, the interest on the $10,000 drawn starts, while the remaining $40,000 remains available for your use without accruing interest.

When your receivables are paid and you pay your line back down over time, you'll have the full amount to draw again when you need to. The interest charges on the $10,000 cease and you’re back to your $50,000 limit to use in the future. You can draw funds as often as you need to up to your limit for as long as you like while the LOC is active. However, lines of credit are not meant to be used as permanent working capital and must be paid down on a revolving basis. If your cash flow needs require you to pay off other debt, a small business term loan such as TD Small Business Loan may be a more appropriate product for your use.

Five reasons why lines of credit are incredibly useful for shorter-term working capital

• LOCs might be your best options if you:
• Need to know you can take advantage of opportunities when they pop up, such as increasing inventory levels, discounts for buying in bulk, pitching for new work, attending conferences, exhibiting, advertising or online and social media promotions
• Face stress paying all your bills or payroll at the end of the month due to a cash-flow issue (maybe a customer hasn’t paid on time, or you’ve experienced an unexpected drop in sales), but your bills and staff still need to be paid
• Want to avoid high interest rates charges from other sources of financing on items that take more than a month to pay back
• Like the idea of a working capital buffer you can rely on at any time
• Don’t want to apply for a loan every time you need funds to cover a temporary need

The COVID pandemic is a great example of how businesses with lines of credit have been able to call on funds for emergencies like payroll, building an online ordering system, solving supply chain issues and even setting up outdoor seating. Lines of credit have given savvy business owners the ability to react immediately and not have to wait for Paycheck Protection Program (PPP) or other loans to be approved.

When a line of credit is perfect for your business

A LOC gives you the freedom to access pre-approved funds for any business needs you have, without having to ask anyone for permission.

• Some examples of how our customers use their small business lines of credit include:
• Landscapers, builders or contractors who are awarded a new contract but need additional equipment and/or staff before they can start. A LOC gives the owner the flexibility to access funds immediately without having to ask the bank for a loan. Once the new contract starts and they receive their first payment, they can repay the LOC funds
• Law firms or agencies that have to bring in staff to work longer hours for a big case. The increased salary bills need to be paid regardless of when a case settles or payment is made
• Retail stores when offered a limited-time discount for buying supplies in bulk, when they don’t have surplus cash and their credit card doesn’t have a high enough limit
• Builders who have to order and pay for supplies to start a house build, but the project is delayed by something outside their control and the deposit hasn’t been paid by the homeowner

Four small business line of credit benefits

1. Immediate access and always there for you
   A LOC for your business is a revolving resource ready for use when you need it, and you only apply once
2. Only pay for what you use
   Interest-only payments on the funds you use. Businesses can pay back principal amounts when their cash flow improves
3. More flexibility than credit cards
   While a credit card is great for monthly expenses, a LOC is there if you need funding for costs that stretch over a month
4. Peace of mind that you have cash available
   Knowing you can handle any expense that is impossible to time or might arise outside your normal business activity

Compare terms between a loan, a line of credit and a commercial mortgage

Applying for a TD business line of credit

The amount of money you could be approved for is based on existing or projected revenue and your credit history and/or cash flow. At TD, you can apply online for up to $100,000 though if you’ve been in business fewer than two years, the online limit is $25,000.

If you want to apply for an amount over $100,000 or for multiple products at once (like a LOC and a term loan or overdraft protection) you must apply in-store. Applying for both online would require an additional credit pull and application.

For additional information to help your application or to find out what you need to apply, review our articles on how we review your loan request and the top questions to ask us.

SBA lines of credit

Finally, TD Bank also offers SBA lines of credit, if a conventional line of credit isn't the right fit. As a Preferred SBA Lender, TD has a dedicated sales team so can provide quicker decisions and faster access to funds.