Business Line of Credit for Working Capital
Working capital — the difference between current assets and current liabilities — measures a business's ability to fund day-to-day operations. A line of credit is one of the most common tools businesses use to smooth working capital gaps: funding payroll, inventory, and operating expenses when cash is temporarily short.
What is working capital financing?
Working capital financing provides short-term funding for operating needs — not long-term capital investment. A line of credit used for working capital is drawn when cash is needed (to pay a supplier, cover payroll during a slow week) and repaid when receivables come in or revenue improves.
Why a line of credit fits working capital
A revolving line fits the cyclical nature of working capital needs better than a term loan. You draw when needed, repay quickly, and draw again — without re-applying or renegotiating. Interest only accrues on what's drawn. This flexibility makes it more cost-efficient than a fixed lump sum for variable, short-duration needs.
Sizing a working capital line
A useful starting point for sizing a working capital line is the maximum cash flow deficit you expect across any rolling 30-day period. Add a buffer of 20–30% for unexpected timing issues. For a business with a maximum monthly cash gap of $50,000, a $60,000–$65,000 line would typically be adequate.
Frequently Asked Questions
- Is a line of credit better than a merchant cash advance for working capital?
- For most businesses, a line of credit is preferable: lower cost, more flexible repayment, and no daily or weekly automated withdrawals that can strain cash flow. MCAs may be faster to access but typically carry higher effective costs.