How to Use a Business Line of Credit as a Small Business Owner

There’s a reason why 40% of small business owners applied for a business line of credit in 2024: it’s accessible and convenient compared to traditional business loans or SBA loans. If you’re thinking of getting one, you might be wondering how to use a business line of credit to maximize its potential.

While barriers to entry might be lower when applying for a line of credit compared to other financing options, there are still some factors to consider to make sure you’re using it to your advantage. 

In this article, you’ll learn more about how to strategically use a business line of credit, including:

• How it works

• How to increase your chances of getting approved

• The best ways to use it as a small business

How Does a Business Line of Credit Work?

A business line of credit is a revolving fund that’s connected to your business checking account. You can draw from it at any time and for any purpose through checks, an app, or even an ATM, depending on the options your lender provides.

It’s similar to a business credit card but with a higher credit limit and lower interest rates, so you can make more expensive purchases like equipment upgrades. You only pay interest on the amount you borrow.

Once you repay what you’ve borrowed, the amount is once again available to use. This is unlike business term loans, where you are given a lump sum upfront that you can only use once and typically require monthly installments.

To make it more convenient for borrowers, some business line of credit lenders, like Backd, offer weekly payments instead of monthly payments. This allows you to have more control of your cash flow.

How to Increase Your Chances of Getting Approved

While requirements can vary among lenders, the common denominator is your creditworthiness. As such, credit line applications typically have fewer requirements compared to small business loans with complicated financial documentation.

Application documents for a business line of credit can include:

• Business records (including the number of years in operation)

• Credit score and credit report

• Annual revenue

If you’re applying for a secured business line of credit, you’ll have to pledge collateral, like real estate. However, if you’re applying for an unsecured line of credit, the main criteria will be your credit score and annual revenue. The higher these numbers, the more likely you are to get approved.

A good credit history is also essential, as it shows that you manage your debts well and have the capacity to pay them off on time. Additionally, some lenders require a business plan because they want to see how you will use these funds. Make sure to include detailed financial projections and a repayment plan to boost your chances.

Finally, ensure that you submit all requirements to fast-track your application. The application process* is often straightforward and simpler than bank loans. They can be done completely online, and you may receive a decision in as little as 6 hours when applying for a line of credit with Backd.**

How to Use a Business Line of Credit: 5 Strategic Examples

While a small business line of credit doesn’t have restrictions, it’s typically used to optimize cash flow and working capital, such as paying for utilities and payroll. Because it’s designed to fund short-term projects, this type of business financing generally has a shorter repayment period.

With that in mind, here are some ways you can use these features to your full advantage.

1. Cover Cash Flow Gaps During Lean Months

You can use a business line of credit during slow months, where sales are historically low, to avoid dipping too much into your working capital or using your investment and marketing budget for operational expenses. Meanwhile, seasonal businesses like holiday-specific retailers or pool maintenance services can time their withdrawals to stockpile inventory to prepare for their peak months.

Another strategic way to use a credit line is to cover emergencies. We know how stressful it can be when you have unexpected expenses while short on cash. Having quick access to funds can help you weather these surprises without pausing your production.

2. Grab Market Opportunities as They Come Up

You can use your business line of credit to take advantage of time-sensitive supplier discounts or inventory sales, instead of waiting for cash inflows. You can also use the funds to launch a marketing campaign to quickly jump into consumer trends and developments. 

Additionally, having easy access to financing enables you to establish timely partnerships with vendors that have innovative materials and production processes that might save you money in the long term. Another cost-saving opportunity is using the funds to get an early payment discount.

3. Use the Funds While Waiting for Invoice Payments

Unpaid invoices or accounts receivable can be an avalanche that buries you real quick if you don’t have a lifeline. A line of credit can help you cover business expenses while waiting for these payments to come through. It can buy you time so you can focus on chasing the invoices or reviewing your billing processes to see where the bottlenecks are.

4. Plan Your Withdrawals to Minimize Fees

There needs to be a balance when you’re using a line of credit. Each time you make a withdrawal, you may accrue draw fees. However, too little usage can result in inactivity fees, which you may need to pay if you haven’t accessed your line of credit for a period of time.

As much as possible, use your credit line to prioritize relatively large purchases and try to pay in cash for smaller ones. Monitor your usage to see how you can optimize your bill or vendor payments so you’re not making too many consecutive withdrawals.

5. Pay on Time to Build a Good Credit History

At some point, you may need financing with higher loan amounts, such as a real estate loan from a bank, to build a new office or factory. If you use your line of credit wisely and pay on time, this will help improve your credit score. As a result, you’ll have a higher chance of getting approved for traditional term loans and receiving better repayment terms and lower interest rates.

Get Quick and Convenient Funding With Backd

Now that you know how to use a business line of credit the smart way, you can explore your financing options. Backd’s working capital products offer you the flexibility and convenience that your business needs to implement your strategies.

Our Business Lines of Credit can provide up to $1 million in funding and terms up to 12 months. We also offer a Business Term Loan*** with up to $1.5 million and terms extending up to 24 months.These funds can be used for any purpose. 

Plus, we protect your credit score by doing a soft credit pull during the application process. 

Our eligibility requirements include:

• $100,000 in monthly revenue

• 650+ credit score

• Established business credit

• Based in the U.S. with a brick-and-mortar address

• Been in business for two years for a Business Line of Credit and one year for a Business Term Loan

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.

***Loans are decisioned and funded by one of Backd's lender partner banks.