Unlocking the potential of a Line of Credit for your small business goes beyond understanding its basic definition. While many business owners are familiar with the concept, they may not fully grasp the specific scenarios in which a Line of Credit can be beneficial.

Small Business owner looking at her line of credit options.

In this blog post, we’ll share the benefits a Line of Credit can offer and break down the difference between fixed and variable payments. We’ll also share scenarios from small business owners, just like you, where a Line of Credit proved to be an optimal or suboptimal choice for their situation.

Why Choose a Line of Credit?

In today’s world, flexibility is king. A Line of Credit offers the freedom to access funds precisely when needed while paying interest only on the amount you borrow. This makes it an ideal financing option for small businesses that experience seasonal or cyclical revenue fluctuations, allowing them to tailor repayments according to their unique financial rhythm.

Suppose you have a $50,000 Line of Credit for your business, but in the first year, you only need $10,000. With a Line of Credit, you’ll only pay interest on the amount you use, which is $10,000. The remaining $40,000 stays untouched, saving you from paying unnecessary interest on those funds. This level of flexibility empowers business owners to make strategic decisions confidently, effectively address unexpected expenses, and maintain smooth operations even during low seasons.

Fixed vs. Variable Payments

OnDeck Canada offers both fixed and variable repayment options.

1. Fixed Repayment

If you value the predictability of a consistent payment structure, then a fixed repayment option might be ideal. With fixed repayment, your total balance is divided into equal weekly payments throughout the term. Regardless of how many times you draw, your balance will be consolidated into a new equal, fixed amount. If you make an unscheduled repayment, your balance will decrease, but your fixed payment will remain the same.

You also have the flexibility to select the specific day when payments are made, allowing you to align it with your business’s cash flow patterns and to allocate funds efficiently.

2. Variable Repayment

With variable repayment, your outstanding balance on the Line of Credit is calculated as a percentage of your principal, plus interest, every week. As you make payments and reduce your principal, the interest you owe decreases accordingly. This dynamic structure results in decreasing payment amounts over time. It’s a good option for small business owners wanting to actively work towards reducing their outstanding balance while adapting payments to their changing financial circumstances.

Should I go with Fixed or Variable?

Both the variable and fixed repayment options have their unique advantages and disadvantages. If you prefer a predictable payment schedule to streamline your budgeting and financial planning, a fixed repayment option might be better. While a variable repayment option may be more suitable for businesses that want to pay down their debt quickly.

Ultimately, it depends on various factors unique to your business, such as your cash flow patterns, revenue projections, and risk tolerance. Consider your business’s specific needs, goals, and preferences when selecting the repayment option that best supports your financial management style.

Scenarios Where a Line of Credit Might Makes Sense

Let’s explore two scenarios where a Line of Credit may or may not be the right option.

Scenario 1 – Graphic Design Studio

Lisa owns a small graphic design studio. Her business relies primarily on project-based work, with clients requesting design services at various times throughout the year. Lisa often needs to cover upfront costs, such as software subscriptions, design tools, and marketing materials, to deliver high-quality work for her clients.

With a Line of Credit, she can easily access funds whenever she needs to cover upfront expenses. For example, when a new project comes in, she can draw from her Line of Credit to purchase the necessary software licenses and marketing materials. Moreover, if clients’ payments are delayed, Lisa can rely on her Line of Credit to bridge the gap and maintain a steady cash flow. Best of all, she only pays interest on the amount she draws, saving her from unnecessary interest costs

The flexible nature of a Line of Credit empowers Lisa to balance her cash flow effectively, meet customer demands during peak seasons and confidently navigate leaner periods.

Scenario 2 – Boutique Clothing Store

Sarah owns a boutique clothing store and wants to expand by opening a new location in a prime shopping district. She calculated the costs involved and needs significant funds upfront to make this expansion possible.

In this case, Sarah might opt for a term loan rather than a line of credit. A term loan provides her with a lump sum of money with a fixed repayment term, allowing her to cover the initial costs of the new location and then repay the loan in installments over a set period.

This scenario highlights that small business owners may prefer a term loan when they have a specific project or investment that requires a large sum of money upfront and prefer having a predetermined repayment plan.

A Line of Credit With OnDeck Canada

At OnDeck Canada, our Line of Credit is tailor-made for small businesses. Here are some of its key features:

  • Access more funds when you need it – even nights and weekends
  • Get instant funding on withdrawals with Interac e-Transfer
  • Ability to withdraw as little as $500 with just a few clicks.
  • Only pay for what you use when you use it.
  • Your balance can be paid down at any time online.
  • A single consolidated repayment, no matter how many times you draw.

To be eligible for OnDeck’s financing programs, your small business needs to be in business for a least 6 months or more and have an average of $100K in annual sales. Click here to see how much your business may qualify for. Applying is 100% risk-free and will not impact your credit score.

Bottom Line

A Line of Credit can be a powerful tool for small businesses, offering flexibility, control, and financial support when needed. Whether you’re a restaurant owner managing seasonal fluctuations, a mechanic navigating equipment upgrades, or a flower shop owner preparing for peak season, the key is to align the features of a Line of Credit with your business’s unique needs and financial goals.