How Does a Business Line of Credit Work? A Complete Guide

Business lines of credit are becoming a preferred method of obtaining the funds small business owners and entrepreneurs need to manage their cash flow. In 2023 alone, 43% of small and medium-sized businesses applied for a business line of credit. 

But what exactly is a business line of credit? And how does one work if your business obtains one? 

In this complete guide, we explore everything you need to know about business lines of credit, how they work, their perks, and how to manage your funds successfully. Plus, learn about the unique requirements SBG Funding has for obtaining a line of credit for your business. 

What is a Business Line of Credit? 

A line of credit (LOC) is a simple concept: access to cash up to a pre-set limit from a bank, credit union, or other financial institution. Once approved, and provided you haven’t exceeded your limit, you can access these funds anytime. 

We’ll use an analogy to better understand how a business line of credit works. Let’s say your business, employees, inventory, and operations are all a city. Now, the water your city relies on to make it through each day is like your cash flow. 

When times are good, and the rain is falling, the cash flow river is full. But when times are tough, that cash flow river can run dry, leaving your business city without the precious water it needs. 

A business line of credit is like the water reservoir for your city. It provides that extra flow when natural rainfall (sales) isn’t enough to cover the water needs (expenses).  

It’s a backup system that enables your business to bridge cash flow gaps to cover necessary expenses. These funds are also handy when making strategic business investments, like purchasing more inventory. 

An unsecured business line of credit differs from other funding methods, such as term loans, where a lender provides a lump-sum payment repaid at fixed intervals with interest over a set period. It’s also different from merchant cash advances, which are also lump-sum payments but are more like a cash advance in that a lender collects payment from sales, such as accounts receivable. 

Instead, a business line of credit is a revolving credit type with greater flexibility and different repayment requirements. When you partner with a high-quality lender, like SBG Funding, these business lines of credit accounts make it easier to operate your company while improving your credit. 

How Does a Business Line of Credit Work? 

A business line of credit’s revolving credit and flexible nature make it valuable for managing your organization’s finances. While it shares some similarities to a business credit card, the lack of annual fees and the unsecured nature make it slightly different. 

To obtain a small business line of credit, a business owner or stakeholder applies for one through a lender. Aggregate sites, like NerdWallet, compile potential lenders for you, but a better option is to skip the sponsored providers and partner directly with a stellar lender, such as SBG Funding.  

You have access to your business lines of credit funds much quicker than other funding methods. For instance, when applying for a business LOC with SBG Funding, businesses see application decisions within 24 hours. 

Business line of credit funds are available up to that pre-established limit, allowing you to control the amount borrowed at any given time. Repaying on your line of credit will enable you to borrow again without reapplying.

Repayment terms vary depending on the lender but usually involve monthly payments with interest. SBG Funding has both monthly and weekly payment options to make repayment easier.

Many business lines of credit carry term limits, some as little as six months, while others are as long as two years. After these terms, a lender may choose to reevaluate the creditworthiness, market rates, and other factors or require re-application for continued access to funds. 

Business lines of credit as a type of financing are helpful for many situations, but one of the most well-known features is the ability to bridge short-term cash flow gaps. It provides immediate access to funds to cover business expenses when seasonality strikes or demand drops. 

Other types of businesses find a revolving line of credit helpful for purchasing startup inventory or making needed repairs and renovations. A business LOC even gives you the capital necessary to make time-sensitive investment deals. 

Key Perks of a Business Line of Credit

Each type of funding provides unique pros and cons, but a business line of credit comes with a handful of perks you won’t find with other options. Some of these benefits include things like:

• Flexible access to working capital—Businesses can draw funds as needed. Once approved, you can draw up to the credit limit without reapplying for capital. 
• Interest savings – Pay interest only on the amount borrowed. This method saves interest long-term over lump-sum business loans, as you don’t pay anything on unused funds. 
• Cash flow management: Having funds available to meet cash flow shortages helps maintain a consistent influx of capital to meet operating expenses. 
• Improve your credit – Responsible use of your business line of credit improves your creditworthiness. A better credit rating means more favorable lending conditions in the future. 
• On-demand capital – Borrow funds up to the credit limit without re-applying or waiting for approval decisions. This rapid access is crucial for time-sensitive deals or addressing unexpected expenses. 

Although a business LOC is an ideal solution for many businesses, there are some drawbacks to be aware of. These drawbacks include becoming dependent on credit, damage to your credit score if you mismanage the LOC, and possible added fees and costs. 

Eligibility and Requirements 

Any time you apply for credit resources, you take a hit on your credit. So, before you start the application process and only get rejected, it’s essential to know the requirements lenders expect when handing over access to funds. 

Business lines of credit are challenging to obtain, with traditional banks and credit unions placing strict requirements. While it’s ideal to have as healthy of finances as possible, exploring business financing options from SBG Funding might be better for your situation. 

SBG Funding is an online lender with many advantages over traditional lenders, such as quicker funding. Check out some of the requirements SBG Funding has for business lines of credit:

• At least six months in business
• Minimum annual revenue of $250,000 
• 600+ FICO credit bureau score minimum

These are the minimum credit requirements for SBG Funding to consider a business line of credit application. To improve your chances, consider providing a more extended credit history and a healthier business performance report. 

Of course, the better your finances rank, the lower your interest rates. You’ll also have access to higher credit limits. Conversely, lower business credit scores and revenue will result in higher interest rates and credit limits.  

Applying for a Business Line of Credit

One of the best perks of a business line of credit is the speed at which funds become available. Where a bank would have you waiting months for a credit decision, SBG Funding’s 24-hour turnaround time and straightforward application make it the perfect lending solution. 

SBG Funding’s application is so simple it only takes three steps to complete:

1. Fill out your application, including general information.
2. Sign your application.
3. Upload your required documents and receive a credit decision.

When applying, you’ll need the following documents:

• The last four months of financial statements
• A valid driver’s license
• A voided check from your business bank account or credit union business checking account

To speed up the process, compile the required documents and information before you apply. Of course, the healthier your finances are, the better your chances are of approval. 

Managing Your Business Line of Credit

We mentioned that one of the pitfalls of a business line of credit is the potential to become dependent on credit. To avoid this pitfall and some other common mistakes, here are a few tips on how to manage your account:

• Borrow only the amount of money you need, nothing more. 
• Select the shortest payback terms possible to avoid draw fees and interest.
• Avoid falling behind on payments. 
• Leverage high-volume times to accelerate pay-off.
• Keep your finances healthy to improve future rates and approval chances.
• Don’t use business lines of credit to purchase real estate.

Accurate accounting, mindful borrowing, and successful management of your credit accounts make future borrowing conditions more favorable. Always discuss options with your lenders to avoid falling behind. 

Get the Funding You Need with SBG Funding

A business line of credit could be the funding solution your business needs to cover cash flow gaps, manage operating expenses, or capitalize on new opportunities. The flexibility, favorable borrowing terms, and quicker access to funds make a business LOC an ideal option for companies. 

SBG Funding’s unique approach to business lines of credit gives you rapid access to the funds you need to keep the cash flow river running. From 24-hour turnaround times to no repayment penalties and rates starting at 1.5% per month, SBG Funding is your ideal partner in business LOCs. 

To take advantage of flexible business line of credit options, apply with SBG Funding today. Or, check out our funding calculator to see how much you could qualify for!