Why Every Small Business Needs a Line of Credit

You’ve launched your small business. You have customers, you’re collecting revenue, and you’ve opened a business checking account.

But there’s a piece of the puzzle many small businesses miss: a line of credit. It’s not just for emergencies or for bigger businesses. A line of credit is financial infrastructure that can unlock working capital when you need it, whether that’s for growing your business or smoothing out cash flow.

How a Line of Credit Works — and Why It’s Different From a Term Loan

Before considering a small business loan or line of credit, make sure you understand how these important financing tools differ.

• A term loan is for a fixed amount, with a fixed payment schedule and specified purpose, such as purchasing equipment. 
• A line of credit is a pool of money you draw from as needed. In some cases, you pay interest only on the outstanding balance. In other cases, the line may include a commitment fee – a small fee against the available portion of the line you aren’t using. The credit is revolving, meaning that as you repay what you’ve drawn down, the available funds replenish.

Term loans and lines of credit are both useful. Typically, a term loan addresses one-time capital needs. By contrast, a line of credit can help small businesses with cash flow management, such as paying vendors and employees while waiting for invoices to get paid.

Why a Line of Credit Helps With Cash Flow

Many small businesses experience this challenge: You’ve performed work and billed customers, but those invoices won’t be paid for 30 days or more. In the meantime, you’ve got operating expenses to cover, such as payroll, rent and supplies. Some business owners attempt to manage by tapping into personal savings, putting payments on a credit card, delaying vendor payments or taking more expensive short-term loans.

One way to smooth cash flow is via financing, including lines of credit. According to the Federal Reserve’s 2025 Small Business Credit Survey, 60% of small employer firms sought financing over a 12-month span, and 56% did so to cover operating expenses.

A revolving line of credit can create flexibility to cover expenses and pay it back after invoices get paid, often at attractive rates. Opening a line of credit with your business bank expands the relationship, building trust and knowledge that can enable your banker to help you anticipate and meet needs in the future as your company continues to grow.

What Fills the Gap When You Don’t Have a Line of Credit

A line of credit can be a match for small businesses looking to smooth cash flow, but it’s not the only option.

Some companies use a business credit card to smooth cash flow. However, credit card rates are typically higher than a revolving line of credit for larger or longer-term draws. A better approach may be to view the two products as complementary. Many small businesses can benefit from both a credit card and a line of credit, particularly with a commercial card program that returns rewards to your business.

Owners may be tempted to take advantage of merchant cash advances, which offer fast cash against future credit card sales. Be cautious, however: these transactions are often expensive, and they could potentially exacerbate the cash flow challenge[1.1] you’re trying to solve. Because merchant cash advances aren’t conventional loans, they’re not subject to the same disclosure requirements as bank loans. A Federal Reserve publication found that some nonbank lenders calculate terms based on a “factor rate” rather than an annual percentage rate (APR) or interest rate — complicating your ability to compare the true cost versus conventional financing.

Your banker can help you select the right balance of financing solutions for your needs today and as your business grows, so you can move forward with confidence. 

How a Line of Credit Supports Small Business Growth 

Lines of credit can also enable growth in your business. Consider these scenarios:

• Your business can say “yes” to a big contract because the line of credit can help fund upfront costs for materials and labor.
• An equipment failure or other unexpected expense can be easier to manage without dipping into personal assets or taking a high-interest loan.
• Opening a line of credit with your business bank can set you up for future credit needs, including equipment financing, commercial real estate and SBA loans.