Businesses typically channel working capital into four main areas: managing operating expenses, hiring staff, funding marketing, and opening new locations. According to the 2025 Federal Reserve Small Business Credit Survey, 56% of applicants cited operating expenses as their primary reason for borrowing, while 46% sought funds for expansion. A business line of credit is well-suited to all these needs because you only draw the amount necessary for each purpose, paying interest solely on the drawn amount rather than the full credit limit.
Working Capital Uses at a Glance
| Working capital use | What it typically covers | How a line of credit helps |
|---|---|---|
| Operating expenses | Payroll, rent, utilities, inventory, insurance | Draw to bridge the gap until receivables arrive, then repay as cash comes in |
| Hiring staff | Salary, onboarding, equipment for a new role | Cover the ramp-up months before a new hire fully pays for themselves |
| Marketing | Ad spend, campaigns, agency or freelancer fees | Fund a campaign per draw and pay interest only while the spend is outstanding |
| Expansion | Fit-out, deposits, pre-opening inventory for a new location | Bridge upfront costs; pair with a term loan for large permanent buildouts |
Cover Operating Expenses and Smooth Cash Flow
The most frequent application of working capital is bridging the gap when daily operations require funding before income arrives. Expenses like payroll, rent, utilities, inventory, and insurance continue even as you wait for customer payments, creating a timing gap that many otherwise healthy businesses find challenging.
This is why operating expenses are the leading reason small firms seek loans: 56% of applicants in the 2025 Federal Reserve survey needed funds to cover them. A business line of credit directly addresses this issue. You draw just enough to cover the gap, repay as receivables come in, and your credit becomes available again without needing to reapply. Since interest is charged only on the drawn amount, maintaining a reserve line costs little. Businesses tend to use lines this way, with median utilization at banks being 50.3% for fixed-rate lines and 38.8% for variable-rate lines in early 2026, indicating firms keep roughly half as a standby resource.
Hire and Retain Staff
When short on staff, the existing team bears the extra load, but revenue may not align with your hiring needs. Working capital allows you to hire before revenue catches up, relieving pressure on your current crew.
A line of credit helps with timing. You can draw funds to cover the initial months of a new hire’s salary and onboarding, then repay it as their impact becomes evident in revenue. This approach beats taking out a full-year loan for a hire who might become self-sufficient in a few months.
Fund Marketing and Customer Acquisition
Marketing pulls double duty: it keeps current customers engaged while attracting new ones. As more spending shifts online, from paid ads to social campaigns, consistent investment gives businesses an edge over those with sporadic efforts.
Working capital allows you to fund campaigns without depleting the cash needed for operations. By drawing against a line of credit per campaign, you keep costs in check: interest accrues only on the active spend, and you can adjust the draw as you gauge effectiveness. Monitor returns before expanding a campaign to ensure borrowing remains aligned with results.
Open a New Location or Expand
Expansion ranks as the second most common reason for seeking financing: 46% of applicants in the 2025 Federal Reserve survey borrowed to grow or seize new opportunities. Opening a new location involves significant upfront costs, from fit-out and deposits to pre-opening inventory and staffing, long before the new site starts generating revenue.
A line of credit can cover these ramp-up costs, allowing you to draw funds in stages as progress unfolds, instead of taking a lump sum that incurs interest from the start. For substantial, enduring projects, a term loan might be more appropriate, as it suits long-term, predictable costs. Tailor the financing tool to the timeline: short-term, variable needs align with a line of credit, whereas long-term, fixed investments align with a term loan.
The Honest Tradeoffs of Funding Working Capital With a Line of Credit
A line of credit offers flexibility, but that comes at a cost. Consider both sides before relying on one.
Benefits to consider:
- Draw only what’s needed and pay interest solely on the drawn balance, not the full limit.
- It revolves: credit replenishes as you repay, no need to reapply.
- One line can adapt to operating costs, hiring, marketing, and expansion.
- Undrawn credit remains available as standby capacity for future gaps or opportunities.
Factors to weigh:
- Draw fees typically range from 1% to 3% per draw. A 2% fee on a $20,000 draw amounts to $400 before any interest, so frequent draws can lead to higher fees than interest.
- Maintenance or inactivity fees, often $10 to $50 monthly or an annual charge, may apply even without draws.
- Bank lines are usually priced at the prime rate (6.75% as of July 2026) plus a margin, causing costs to fluctuate with rates.
- A personal guarantee is standard even on an unsecured line. “Unsecured” means no pledged collateral, but you still provide a guarantee.
- Online lenders offer faster funding but at a higher cost: 60% of firms borrowing from online lenders reported unexpected higher costs.
Match the Funding to the Need
Working capital transforms challenges into manageable line items, whether it’s covering payroll, hiring new staff, ramping up marketing, or opening a second location. The key is aligning the funding type with the need, so you’re not paying long-term interest on short-term gaps or straining cash flow on long-term investments.
REIL Capital’s business line of credit is designed around the draw-only-what-you-need concept and is one of seven financing products ranging from $5,000 to $10,000,000, enabling you to choose the right tool for the situation. If slow-paying customers are the real issue, invoice financing can convert receivables into working capital instead. For more on the accounting side, see our explainer on fixed capital versus working capital.
Frequently Asked Questions
How can a small business use working capital?
Small businesses primarily use working capital to manage operating expenses, hire staff, fund marketing, and support expansion. In the 2025 Federal Reserve Small Business Credit Survey, 56% of applicants sought financing for operating expenses, and 46% for expansion or new opportunities.
What can a business line of credit be used for?
A business line of credit can address nearly any short-term working capital requirement: payroll, rent, inventory, marketing campaigns, or bridging a seasonal cash-flow gap. You draw only what’s needed, paying interest only on the drawn amount, and your available credit replenishes as you repay.
How does working capital help with cash flow problems?
Working capital bridges the gap between outgoing bills and incoming payments. When bills are due before customer payments arrive, you can draw on a line of credit to meet obligations and repay once receivables come in, preventing timing gaps from turning into missed payrolls or rent payments.
Is a line of credit good for covering operating expenses?
Yes. Operating expenses are the most frequent reason small firms seek loans, noted by 56% of applicants in the 2025 Federal Reserve survey. A line of credit suits recurring, variable costs because you draw only what each month demands instead of taking a lump-sum loan with full interest.
