Does My Business Need a Working Capital Revolving Line-of-Credit?

Joe McCaffrey

Business Advisor

Community Investment Corporation

February 25th, 2026

What the heck is a working capital revolving line-of-credit!?!

Admittedly, I'm stringing a lot of words together here.  The name may sound complicated, but it's actually very simple.  Let me explain: Working capital is the amount of money you need to keep your business operating.  Money is constantly flowing in and out of the business at different times, and you need more flowing in than what's going out in order for the business to remain financially viable.  But the timing of inflows and outflows isn’t always the same. 

A line-of-credit is similar to a credit card that you carry around in your wallet.  When you need or want to make a purchase and you don't have enough cash to pay for it, you can use the credit card, and (hopefully) pay it off when the bill comes due 30 days later. 

A credit line, as well as a credit card, provides a cash reserve for unforeseen circumstances.  Each instrument provides access to capital when you're short on cash.  Every business should have a credit line, in case you find yourself in a situation where you need 'fast cash'.  It's there if you need it, but you don’t have to use it if you don't.  It's a form of reserved borrowing power. 

The key feature of both the credit line and credit card is that the loan revolves.  What I mean is, as you draw down funds, your available balance decreases, and as you pay it back, it goes back up. 

How does a working capital revolving line-of-credit work?

With a credit line, you transfer funds from the credit line account to your checking account and either write a check or use a debit card to make the purchase.  This way, you have money in the account to cover the purchase. 

Unlike a credit card that gives you a 30-day grace period, with the credit line, interest starts to accrue from the moment you transfer the funds to your checking account.    

This begs the question of, why should I use a credit line instead of a credit card?  The primary reason is that the interest rate on a credit line is usually at least half of what a credit card rate is because the credit line is typically secured with a higher lien priority, whereas the credit card usually isn’t.  Both instruments can be useful, and we typically advise clients to have both, if possible. 

Like a credit card, you have discretion as to how much you want to pay each month on the credit line, but you have to at least pay the interest due for the month.  The minimum payment on a credit card doesn’t always cover the interest. 

What is the purpose of a line-of-credit (why do I need it?)

As previously mentioned, the credit line provides funds for when you're short on cash.  Typically this happens when the business has an accounts receivable that is longer than their payables.  For instance, you have a contract with a client to pay you at the end of a job, but you need to pay your suppliers and employees in the interim.  The credit line fixes the timing problem by plugging short term gaps between the receivables and payables. 

Working capital credit products should only be used for ultra-short term financial needs.  Don’t finance long-term projects with short-term money, and vice versa.  This is where businesses can get into trouble.  If the expected timing difference between the payable and receivable is short (i.e. 30 days, maybe 60, but never more than 90 days), go ahead and use the credit line or credit card. 

Similarly, there should be a high expectation that the receivable will, in fact, be received within a short period of time.  If your business is in contraction mode, tapping a line-of-credit is generally not a good survival strategy, again, because of the timing difference between the drawdown of the funds and the payback is likely to be longer than what it should be. 

Use good financial management principles in your business, much like you hopefully do with your personal finances.  If you can't pay for the purchase within the allowable time period, don't buy it.  The only exception would be an income-producing purchase that produces 'positive leverage (i.e. the return on investment is greater than the cost of debt).  But even in that instance, realize that the higher the cost of debt, the less your profit will be. 

In my opinion, there are two types of debt: good debt and bad debt.  Good debt is debt that produces positive leverage.  Conversely, bad debt produces negative leverage.  Bailouts are usually bad debt.  Typically, all you're doing is digging the hole deeper. 

How large of a credit line do I need?

This is a great question, and it can be difficult to answer.  I hate to answer a question by saying 'it depends', but it depends.  It depends on what type of business you have, how often you finance receivables, and how large your business is.  As a general rule, you should have a credit line equal to 20% of annual sales.  Again, you may need more or you may need less. 

Here's another way of answering this question.  Your business has a credit score, much like you have a personal credit score, and the calculation of your business credit score works much the same way as your personal credit score.  Ideally, you don't want to have more than 30% of your total available credit line outstanding.  Let’s say you carry an average monthly credit card balance of $10,000.  In that case, you should have a credit limit of at least $33,333. 

Most importantly, ask for what you think you really need.  When the bank asks, "How much money are you looking for?", the wrong answer to this question is, "Well, how much will you give me?"  Be specific.  You need the credit line for a specific reason, so you should be able to answer this question with specificity.  When speaking with any potential capital provider, you always want to sound like you know what you're talking about. 

What do I need to qualify for a credit line?

A commercial line-of-credit is generally granted to a business that has demonstrated viability and feasibility over a period of time (i.e. a least a few years).  In other words, your business has to look good on paper, meaning your sales are growing, your business is profitable, you’re not bouncing checks, etc.  Cash flow matters more than paper-profits because you need cash in order to make the loan payments.  You also want to have a good business credit score because the bank is probably going to check it. 

The best time to shop for a credit line is when you don't really need it.  These are loan products for stable companies, not those in distress. 

If you're a startup business or you don’t have the requisite operating history, you may be able to get a credit card in the name of the business, but with a personal guaranty, which means the lender is going to look at your personal FICO score.  They may also look at how much money you have in your personal accounts at their bank. 

Where can I go to get a line of credit?

What I tell my clients is, go to your bank and inquire about their credit line products, which will likely include SBA-guaranty products.  The reason you should speak with your bank first is because they (hopefully) know you and your business.  They see your transactions.  They know your cash flow history. 

As a condition of giving you a credit line, expect the lender will require you to move your business banking to their bank.  And maybe even your personal accounts. 

What does it cost?

Some companies don’t make it because money isn’t available to them when they need it, which is why I mentioned previously that access to capital is more important than the cost of capital.  When you need money for your business, it's sort of like when the water heater lets go in your house.  What’s the first question you ask the plumber when/if you get them on the phone?  It's probably, "How soon can you get here?", not "How much is this going to cost me?"  At that moment, you don't care what it costs.  Your water doesn’t work and your basement is flooding.  It's a crisis situation.  And when the plumber is done, what you do if you don't have enough cash or money in the bank to write a check?  You whip out your credit card (i.e. pay for it with your line-of-credit). 

If you’re shopping in advance, look at the costs and fees.  Consider the total cost, not just the interest rate.  Commercial credit lines usually have an annual fee, just like some credit cards.  Also, commercial credit lines usually have a specific term (ex: one to five years) and a requirement that the balance has to brought down to zero at least once during the term. 

Also, be sure to review the credit agreement so you understand the covenants, which are the ongoing, post-closing requirements, such as sharing your periodic financial statements, maintaining certain financial ratios, etc. 

If you have other credit facilities, such as a term loan, be sure to check the covenants before taking on any additional debt.  Prior authorization by the existing lender may (likely will) be required.  Failure to obtain such authorization could trigger an event of default. 

Are there alternatives loan product instead of a line-of-credit?

There are different types of working capital instruments (ex: merchant cash advances, factoring, etc.), and some are more favorable than others.  Which one is best for your business?  I don’t want to say 'it depends', but…

Let me put it this way: The right working capital tool strengthens operations and gives your business flexibility, and the wrong one takes it away.  I can't take credit for that brilliant line.  I stole it from CIC's CEO and my co-host on our podcast, Louis Silva.  Louis also came up with the 'access to capital vs. cost' line.  That's why he's the CEO, folks! 

Cash-on-hand and free cash flow can function as a self-funded credit line.  However, the opportunity cost of using cash and free cash flow may be greater than the interest cost on a working capital loan, depending on how profitably you can deploy the capital.  The business operations may be so profitable that you're able to achieve 'positive leverage' (i.e. you're making more than the cost of capital).  In that case, invest the cash (that you're probably making next to nothing on) in the business and use the credit line for any cash flow deficiencies.  If you're not going to keep a cash reserve, you're definitely going to need a credit line product for unforeseen situations.

Final word:

In my experience, the most successful and profitable businesses are almost always run by financially savvy owners.  Having a working capital revolving line-of-credit and using it responsibly are signs of a well-run company.