Over the last ten years, the CircleUp Credit Advisors team has connected with thousands of entrepreneurs with the same question: “What’s the best way to fund my business?”
Many entrepreneurs seek out non-dilutive financing options like revolving lines of credit to keep full ownership of the business. In fact, according to the Federal Reserve Bank’s 2021 Small Business Credit Survey, last year, 72% of U.S. small businesses applied for a line of credit or a business loan, while only 28% applied for a business credit card.
What is a revolving line of credit?
A revolving line of credit works as a business loan. It provides fast access to large sums of cash to support, grow, and maintain a business. Lines of credit can be as low as a couple of thousand dollars or as high as tens of millions.
A line of credit is a non-dilutive financing option, meaning business owners maintain complete ownership, control, and profits accrued in their business. This type of financing is ideal for growing companies looking to scale, whether that’s into new retail locations, digital marketing campaigns, or research for new product lines.
With a revolving line of credit, as a borrower submits a payment they can immediately spend up to the full amount of the original line of credit. With a traditional loan, borrowers would need to spend the loan’s full amount and then reapply for an additional loan.
Who should use a revolving line of credit?
Revolving lines of credit are best suited for growing businesses that experience cycles or one time events where they run short on cash, also known as “cash crunches” as a part of their growth. Causes of these “cash crunches” can be numerous, and they are an issue that even otherwise very healthy businesses can run into. Lines of credit are not one size fits all, which presents great flexibility for businesses to access increased funding opportunities as they grow. Borrowers can find an array of products that match their current scenario. Beginning borrowers, for instance, tend to find term loans the best option, while more mature companies generally prefer larger, asset-based lines of credit.
Here at CircleUp Credit Advisors, we offer a variety of options based on the maturity of your business, and we can scale with you as you grow. We’ve seen businesses take out a $10K line of credit, then within two years they’ve moved to $500K and after 4 years they’re grown to a $2 million line of credit.
Lines of credit are best suited for large-ticket needs such as maintaining cash flow, and should not be used for day-to-day spending. Many of our credit customers use lines of credit to cushion cash flow between equity rounds, fulfill large Purchase Orders (POs), and enter new markets or large retailers. Below, we cover ten different ways to use a revolving line of credit to level up your business.
9 Ways to Use a Revolving Line of Credit to Level Up Your Business
1. Accounts receivable financing
Most retailers have 30, 60, or 90-day payment terms. Rather than waiting for the end of the term period to receive payment for a completed PO, lenders will advance upon these assets so you get cash upfront to put towards continued growth.
2. Supply chain concerns
Given the uncertainty surrounding today’s global supply chain, many companies have started to produce inventory before receiving a purchase order and, as a result, are sitting on more finished goods than what is considered “normal”. A lender can advance upon the additional assets that may be waiting in a warehouse before they’re sent out to a retailer to help business owners unlock value in their current inventory.
3. Inventory financing
If you have a durable good or a product that is shelf-stable, such as frozen pizza, or shelf-stable ingredients, such as oil, flour, and salt, in inventory, a lender can leverage those assets to give you a portion of their total value in immediate capital. As an example, let’s say you have $500k of total inventory, a lender like CircleUp Credit Advisors could offer you some percentage advance on that. For instance, a 50% advance on $250k would equate to a $125k loan. So instead of waiting to sell $500k worth of inventory, the brand could leverage it to go buy more inventory or cover other operating expenses.
4. New retailer launch
Businesses that have committed to launching into a new retailer need to prepare large inventory orders to fulfill the retailer’s PO. A lender can advance upon this PO to provide the capital required to produce the inventory to fulfill the order and get you into the new retailer.
5. Door growth
Similar to new retailer launches, many businesses that sell into a retailer in one region often look to expand their footprint into stores in additional regions. This type of expansion generally comes with a lot of upfront cost to build the necessary inventory. Businesses can leverage POs in new regions from an existing retail partner in order to obtain sufficient financing to build the inventory needed for door growth.
6. Launching a new product
A successful new product launch takes time and resources. Between promotional activities like free fill products and promotional discounts, and in-store advertising additional capital is often needed to ensure the product’s success. A revolving line of credit can easily help business owners properly launch new products.
7. Extending your cash runway
Creating CPG products is expensive. It’s not uncommon to look at cash flow projections and notice that you will need additional capital in the next 12 months. While raising funds from investors is a great option, for business owners that aren’t quite ready to raise, or want to wait out the major macroeconomic headwinds currently negatively impacting VCs’ dry capital, can extend their cash runway with a revolving line of credit, which offers time to delay raising equity in order to get a high valuation based on the continued success of the business. You can see how one of our credit customers, Splendid Spoon, used this method to raise a $12M series B.
For businesses looking acquire expensive machinery or other equipment, a revolving line of credit can be a great solution for having the necessary upfront capital. This is a great option for anyone looking for a piece of equipment to increase margins or bring a part of production in-house to protect you from further supply chain issues. Equipment lenders can help with this and also limit their security interest to the piece of equipment allowing you to work with other lenders to leverage additional assets.
9. Negotiating better Accounts Payable (AP) terms
With a line of credit in place, some suppliers may be willing to offer better payment terms given they know you have access to additional capital. As a result, you may be able to negotiate 120-day AP terms versus 90-day, allowing you to better spread your cash and have more time before having to pay certain bills.
Beyond this list, there are so many other ways to utilize a revolving line of credit to level up your business! If you’d like to learn more about how credit offerings can help support your business, we’d love to connect with you.