A business line of credit will mature in one to two years, but the interest rate you pay will depend on the amount of credit used and the amount of time a borrowed balance remains unpaid. 

In other words, using a business line of credit for small expenses well within your maximum spending limit and then paying them off quickly will allow you to leverage a relatively cheap source of capital, with interest rates as low as 8%. There’s also nothing that requires you to borrow against the credit you’ve been allotted, so you might open up a business line of credit that you save strictly for emergencies. By reserving your business line of credit for unforeseen expenses, you can preserve your working capital and ensure that other pressing business needs continue to be met.

Is a business line of credit a smart source of financing for your business? It could be if any of these situations sound familiar:

• You don’t need to borrow right away but instead want access to credit in case of an emergency.
• You need financing to survive the slumps between booming seasonal sales periods.
• You have dependable customers who are slow to pay invoices and you need a source of financing to maintain your working capital.

Maybe business is strong at the moment, but you’re expecting a lull after the holiday shopping frenzy. Applying for a business line of credit now—before you’re in a financial bind—will help you limit your borrowing and better weather a seasonal dip in sales. If you have strong financials but want access to a source of credit in case of an emergency such as a supply chain crisis or a critical equipment failure, a business line of credit could be just the safety net you’re looking for.

Would another financing option be more appropriate than a business line of credit? Yes, if:

• You need to borrow more than $250,000.
• You want to break down a significant purchase into smaller payments with a longer-term option such as an SBA loan or business term loan.
• You plan to pay off smaller purchases immediately and would rather earn cashback rewards with a business credit card.

If you’re looking at a major investment like a new location for your business, you risk quickly maxing out a business line of credit and paying a premium on the amount borrowed. Instead, a commercial mortgage would be a better fit to allow you to pay for the new property over 20-25 years with a much lower interest rate. Acquiring a competitor would also warrant a different option, with a business acquisition loan offering better rates and more flexible term lengths to fund the more substantial purchase.