There have been many times during my lending career when a call from a customer (or potential customer) has started with some version of the following sentence:
“I’m calling to ask what the interest rate is for a business loan.”
It’s a fair question, and one I hear often, but truth is that there’s no one-size-fits-all answer. Business loans come in many forms, and each is structured and priced based on the borrower’s specific needs and the customized underwriting of the request.
Traditional term loans typically involve borrowing a fixed amount upfront and repaying it in regular installments, plus interest, over an agreed-upon period. But in many of these conversations, after some discussion and information gathering, it becomes clear that what the customer really needs isn’t a traditional loan, but rather a Line of Credit (LOC).
While a LOC is technically a loan, it works quite differently than a standard term loan. Instead of a lump sum, it offers flexible access to funds up to a preset limit, allowing businesses to borrow, repay, and borrow again as needed.
In this piece, I’ll walk you through what a business line of credit is, how it works in real-world situations, and why it might be the right tool for your business, especially if you’ve ever asked that same initial question.
LOCs Explained
An LOC — also commonly referred to as a Revolving Line of Credit, a Working Line of Credit, or a Business Line of Credit — is a flexible financial tool that gives businesses short-term access to capital. It comes with a preset borrowing limit, and the borrower can access all or part of those funds as needed.
Unlike a traditional term loan (where you borrow a fixed amount upfront and repay it in regular installments over a set period) an LOC allows you to borrow only what you need when you need it. You only pay interest on the amount you’ve drawn, and while regular interest payments are required, principal can typically be paid down over time, as cash flow allows. Once you repay the principal, those funds become available to borrow again.
For many businesses, a traditional loan isn’t always the best fit. If your capital needs are ongoing or fluctuate — such as covering seasonal inventory purchases, managing cash flow gaps, or unexpected expenses — committing to a lump sum loan with fixed payments can be limiting or even burdensome. You might end up paying interest on money you don’t need yet or struggling to make large, fixed payments during slower business periods.
A Line of Credit, on the other hand, provides more flexibility. It works like a business credit card but often with better interest rates and more tailored terms. You have the freedom to borrow only what you need, repay it at your own pace, and access funds again when necessary. This revolving feature helps smooth out cash flow fluctuations, making it easier to manage your day-to-day operations without the pressure of large monthly payments on a fixed loan amount.
In essence, an LOC acts as a financial safety net and growth enabler, especially useful for businesses with unpredictable expenses or seasonal ups and downs.
Example of LOC in Action
Let’s say you own a t-shirt and gift shop in a busy beach town. In the spring, you need to stock up on inventory to prepare for the summer season — and that upfront cost can add up quickly. With an LOC in place, you’d have quick access to the funds you need to buy inventory at wholesale prices.
Then, throughout the summer, as you sell products at retail prices, you pay down the line, ideally leaving you with a healthy profit. Once it’s paid down, that credit is available again for future needs. LOCs are a powerful tool for smoothing out cash flow, managing inventory, or covering short-term expenses, especially for businesses with seasonal sales patterns.
Final Thoughts
At SBSI, we regularly provide LOCs to local businesses to help them grow and thrive. In turn, these businesses help strengthen our communities and local economy. If you think an LOC might be a good fit for your business, a brief, no-obligation call with one of our experienced commercial lenders is a great place to start. We’re always happy to answer questions, explore options, or just talk through how it all works.
