A Guide to Business Lines of Credit for Small Businesses
Cash flow challenges are a reality for nearly every business, whether you’re covering day-to-day expenses, preparing for a busy season, or jumping on a growth opportunity. A flexible financing option, like a business line of credit, can be the difference between staying on track and falling behind.
Business lines of credit give you access to funds you can draw from as needed, rather than taking on a lump-sum loan all at once. Plus, if you have a revolving line of credit, your balance will replenish as you make repayments, meaning you can repeat the cycle of borrowing and investing as needed.
In this guide, we’ll answer all your questions about business lines of credit — explaining what they are, the difference between revolving and non-revolving credit lines, and how they compare to small business loans. You’ll also learn common ways businesses use lines of credit, typical qualification requirements, and what to expect when applying.
What Is a Business Line of Credit, and How Does It Work?
A business line of credit is a type of short-term financing that allows a business to access funds when they need to. Withdraws can be made in any amount up to the available credit limit, and whatever is withdrawn is repaid with interest.
There are two types of business credit lines: revolving and non-revolving.
Revolving Line of Credit
This is the most flexible option, working somewhat like a business credit card. Whenever the borrower pays back a portion of the withdrawn funds, that money is added back to the credit limit and becomes available for use again.
For example, if you had a $50,000 revolving business line of credit and withdrew $10,000, you would have $40,000 left that you could borrow. Let’s say you then paid back $5,000 of what you borrowed. Since it’s a revolving line of credit, that portion of your credit limit would replenish, and you’d have $45,000 available.
Non-Revolving Line of Credit
Non-revolving credit lines are still a great option for getting financing quickly, but they do offer less flexibility than revolving credit lines because they don’t replenish as you pay back your outstanding balance. Sticking with the above example, if you borrowed $10,000 from a $50,000 credit limit and paid back $5,000, you’d still only have $40,000 left to borrow.
How Is a Small Business Line of Credit Different From a Small Business Loan?
The main difference between a term loan and a business line of credit is how the funds are disbursed.
With a business line of credit, you immediately have access to the full credit limit but get to choose how much you want to withdraw and when. With a loan, you receive the full loan amount upfront in one lump sum.
This distinction affects how interest is accrued. When taking out a loan, you pay interest on the total amount. With a line of credit, you only pay interest on what you withdraw, not the total amount you could borrow.
One other difference is that term loans, on average, have lower interest rates than business lines of credit. However, interest rates depend on a variety of factors, including the lender, your location, market conditions, your creditworthiness, and the loan or credit terms. For example, a borrower with a low business credit score might receive a higher interest rate offer than a borrower with a high credit score — even if they want to borrow the same amount of money from the same lender.
What Can a Business Line of Credit Be Used For?
Unlike some types of business funding, you can use a business line of credit any way you need or want. When you withdraw money from a line of credit, it’s deposited right into your business checking account, making it easy to access and use.
Here are just some of the ways you can put the funds from a line of credit to work for your business.
Cover Unexpected Expenses
Even with meticulous balance sheets and cash flow forecasting, surprises happen. Perhaps a core piece of machinery needs to be repaired or replaced, or maybe broader economic shifts lead to an unplanned increase in expenses. No matter what the reason, when you have a business line of credit, you can easily access the cash you need to cover the expense and keep operations on track.
Invest in Growth Opportunities
Looking to add new products to your roster, expand your team, or open a new location? You don’t want to be held back by a lack of capital when growth opportunities arise. With a business line of credit, you’ll have the cash available to invest in your business and pay back the financing as your revenue grows.
Bridge Cash Flow Gaps
Business is often cyclical – you have periods of high cash flow, and periods of low cash flow. When you hit those low spots, you still have to pay wages, cover overhead costs, and stock inventory.
While you wait for the next sale to be made or invoice to be paid, inject some extra working capital into your business with a line of credit. By having one open and available, you’ll have the funds on hand to cover these expenses and bridge the gap. You can pay your employees on schedule, fully stock your shelves, and keep the lights on until more abundant times roll around.
Prepare for Seasonal Demand
Sometimes, you know a profitable season is just around the corner. Retailers experience their highest months around the holidays, while construction and landscape businesses see a boost in the spring and summer.
You want to be ready to meet the demand, so you need to invest in tools, inventory, or supplies ahead of time. A business line of credit can help you do that. You withdraw the money you need to make your preparations, and then when the anticipated demand hits, you’ll have the extra injection of cash you need to repay and replenish your credit limit.
How Much Funding Can I Get for My Business With a Line of Credit?
The maximum limit of your business line of credit depends on which financial institution or online lender you borrow from and how well your business satisfies its requirements. Businesses with higher monthly revenue and healthier credit scores, for example, will often receive higher credit limits than smaller businesses with a less established credit history.
Backd offers business lines of credit with limits ranging from $50,000-$1 million. These credit lines operate on a revolving basis, so paying your balance replenishes your limit and allows you to invest more.
What Are the Requirements to Qualify for a Business Line of Credit?
The eligibility requirements for a business line of credit will vary from lender to lender and might include your monthly revenue, time in business, credit score, and location.
When you partner with Backd, the eligibility is straightforward:
$100,000 in monthly revenue
A 650+ FICO credit score
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for two years
Is It Hard to Get a Business Line of Credit?
No – as long as you meet the above requirements, opening a business line of credit is not hard. Backd keeps the application process* simple: Submit your application online in just a few minutes and receive a funding offer in as little as 6 hours.**
From there, you review the loan terms and accept the offer. You’ll get access to a dashboard that allows you to track your draws and payments.
Additional FAQs About Business Lines of Credit
Still have some questions about business lines of credit? Check out these answers to other common queries.
Can You Get a Line of Credit to Start a Business?
It’s not impossible, but it’s not likely. In most cases, you’ll need to seek specific new business funding options. Once you’ve established your business, it’ll be easier to get a line of credit that you can use to further grow your young business.
How Long Do You Have to Be in Business to Get a Line of Credit?
Most lenders want applicants to have been in business for 1-3 years. For example, Backd requires two years in business for our business line of credit product.
How Do I Establish Business Credit for the First Time?
It usually takes up to three years for a business to establish its credit profile.
Start by opening up a business bank account. Then, focus on managing your business finances well and making all monthly payments on time to prove your creditworthiness.
While you wait for your business’s credit profile to take hold, you can leverage your personal history to apply for credit cards and other financing options.
Propel Your Business Forward With Backd
A revolving business line of credit can be a powerful tool for managing cash flow, handling unexpected expenses, and staying ready for growth. Its flexibility allows you to borrow what you need, when you need it. Plus, you’ll only have to pay interest on the funds you use.
Compared to traditional term loans, this makes a line of credit well-suited for funding day-to-day business needs, preparing for seasonal demand, and covering short-term financing gaps.
Here’s how Backd makes getting a line of credit easy so you can get back to business:
Apply online in just 3 minutes.
Get a funding decision in as little as 6 hours.
Access funds up to $1 million directly from your account dashboard.
Make weekly payments during repayment terms of 6-12 months.
Continue investing in your business — as you pay down your balance, you can immediately borrow more.
Apply now and receive a funding offer within as little as 6 hours.
*Your application, including the amount, cost, and approval, is subject to review and is not guaranteed. Terms and conditions subject to change without prior disclosure or notice.
**Decisions and funding may take additional time and not be same-day. Additional information may be required. Time to receive funds varies based upon your financial institution's receiving schedule and operating hours.
