A business line of credit allows businesses to borrow money up to a set limit. The funds can then be used for operating expenses like payroll, rent, supplies, and more.
Lines of credit are revolving, which means as money is repaid, it can be borrowed again up to the credit limit. This flexibility makes lines of credit useful for managing cash flow fluctuations and short-term funding needs.
How Lines of Credit Fund Payroll
Lines of credit allow businesses to fund payroll when expenses exceed revenues. For example, a seasonal business may use a line of credit to meet payroll obligations during slow months when sales are lower.
The business can draw money from the line of credit to cover net payroll until revenues increase again. The flexibility and on-demand access to funds helps businesses manage payroll smoothly despite uneven cash flows.
Disadvantages of Using Lines of Credit for Payroll
Lines of credit can seem convenient for payroll funding, but there are some potential pitfalls to consider. Interest costs on lines of credit are variable and can increase over time, driving up the overall expense of payroll. Businesses that lean too heavily on credit lines risk taking on excessive debt and overreliance. High credit line balances can also negatively impact a company’s ability to qualify for future financing if needed.
Qualifying for a line of credit requires bank underwriting and approval, which some businesses may not receive based on factors like credit history and time in business. Finally, tapping credit lines frequently can mask underlying problems with profitability, cash flow management, or high operating costs. While lines of credit have their uses, businesses should weigh these potential disadvantages before using them for recurring payroll funding.
