A business line of credit is a reusable credit limit — you draw what you need, repay it, and borrow again, paying interest only on the outstanding balance. Bank lines typically run Prime + 1–4% (roughly 8.5–11.5% in mid-2026) with limits up to $1M+; online lender lines run 15–45% APR but approve at 620+ credit with as little as 6 months in business. A line of credit fits recurring, irregular, or short-term cash needs best — for a single defined purchase, a term loan is usually cheaper.
Chapter 4: Business Lines of Credit — Flexible Cash When You Need It
Some months are tight, some are flush, and a few bring a surprise bill you didn’t plan for. A line of credit is the tool built for that reality. Instead of a lump sum you start paying interest on immediately, you get a credit limit you can tap when you need it — and ignore when you don’t.
This chapter covers how a line of credit works, what it really costs, when it’s the right call, and how to qualify for good terms.
What a Line of Credit Is
A business line of credit (LOC) is revolving credit: a set limit you can draw from, repay, and draw from again. Think of it as a financial safety net rather than a one-time loan.
Say a retail shop has a $50,000 line. It draws the full amount in November to stock up for the holidays, repays it in January, and has the entire $50,000 available again for a spring promotion. You only pay interest on what you’ve drawn — not on the limit sitting unused. That flexibility is what makes a line of credit one of the most useful day-to-day financing tools an owner can have.
Secured vs. Unsecured
The first fork is whether the line is backed by collateral.
- Secured line: backed by business assets like receivables, inventory, or equipment. The collateral lowers the lender’s risk, which usually means higher limits and lower rates.
- Unsecured line: no specific collateral, though it often still requires a personal guarantee. Faster to get, but typically lower limits and higher rates, since the lender is leaning on your credit profile alone.
Revolving vs. Non-Revolving
Most business lines are revolving: draw up to your limit, repay, and that capacity comes back. Draw $20,000 against a $100,000 line and you have $80,000 left; repay it and you’re back to $100,000.
A non-revolving line doesn’t refill — once you repay, the line closes. It’s less common and used mostly for specific, one-time projects. The revolving structure is the whole appeal, so make sure you know which one you’re being offered.
How Draws and Repayments Work
Once you’re approved, drawing funds is usually simple — an online transfer, a business check, or a linked card, often hitting your account fast. You pay interest only on what you actually draw.
Many lines run on a draw period (commonly 6–24 months) where you can pull funds and make interest-only or small principal payments, followed by a repayment period where you pay the balance down. Confirm your specific schedule up front so a shift from draw to repayment doesn’t surprise you.
What It Really Costs
Interest is usually charged daily on your outstanding balance, not on the full limit. A rough daily figure is:
(Outstanding balance × annual rate) ÷ 365
So a $15,000 balance at a 12% APR costs about $4.93/day — roughly $148 over a 30-day month. Repay early and you simply pay less.
Interest isn’t the whole bill, though. Watch for:
- Origination fee — a percentage of the limit, charged up front.
- Annual or maintenance fee — a flat yearly charge on some lines.
- Draw fee — a small charge each time you pull funds.
- Minimum-usage fee — charged if you don’t draw a set portion of the line.
Add these up before committing; a low headline rate can hide a costlier line.
Where to Get One
Lines of credit come from two broad sources, and the right one depends on how you weigh cost against speed:
- Banks and credit unions typically offer the lowest rates and highest limits, but approval is slower and the bar is higher — stronger credit, more time in business, more documentation.
- Online lenders approve faster and qualify more businesses, often connecting to your accounting or bank data to make a quick decision. The trade-off is higher rates and, sometimes, lower limits.
When you compare offers, look past the advertised rate to the limit, repayment schedule, and full fee list. The cheapest-looking line isn’t always the cheapest line.
For a side-by-side breakdown of three of the most popular online line-of-credit lenders — including rates, FICO minimums, and which fits which borrower profile — see OnDeck vs Fundbox vs Bluevine: Which Is Right for You?.
Best Uses for a Line of Credit
A line of credit shines for short-term, fluctuating needs:
- Covering cash flow gaps — making payroll and rent while you wait on a big customer payment.
- Buying seasonal inventory without draining your cash reserves.
- Handling surprise expenses — a failed HVAC unit, an urgent repair.
- Capturing early-payment discounts from suppliers, where the savings beat the interest.
It’s a poor fit for long-term investments like real estate or multi-year expansion — those belong with term loans or SBA loans at fixed, lower rates.
How to Qualify
Lenders weigh a handful of factors:
- Personal credit — higher scores meaningfully improve your odds and your rate, especially with online lenders.
- Time in business — many want at least 6–24 months of operation.
- Annual revenue — minimums vary, but steady revenue matters more than a single big month.
- Bank account health — lenders study your average balance and cash flow patterns.
The strongest qualifiers are simple: consistent revenue and a clean credit history. A business with a couple of solid years, reliable revenue, and good credit will see far better offers than one applying in a crisis.
Build Business Credit for Better Terms
A separate business credit profile can earn you higher limits and lower rates over time — sometimes without a personal guarantee:
- Incorporate (LLC or corporation) and get an EIN.
- Open a business bank account and keep personal spending out of it.
- Establish trade credit with vendors that report to business bureaus like Dun & Bradstreet, Experian Business, and Equifax Business.
- Use a business credit card and pay it in full each month.
After a year or two of responsible use, you’ll often qualify for stronger lines at better rates. Chapter 9 covers building approval odds in depth.
Line of Credit vs. Other Options
A line of credit isn’t always the right tool. Here’s where it wins and where something else fits better:
| Your need | Line of credit | Better alternative |
|---|---|---|
| Ongoing cash flow | Best option — draw and repay as needed | — |
| Seasonal inventory | Strong fit — borrow for the season, repay after | — |
| One-time equipment buy | Weaker — no collateral advantage | Equipment financing (Ch. 6) |
| Emergency cash, weak credit | May not qualify fast enough | MCA (Ch. 2) |
| Large, long-term expansion | Too costly for multi-year needs | SBA loan (Ch. 3) |
| Bridging unpaid invoices | Works, but not specialized | Invoice factoring (Ch. 5) |
It’s worth comparing your real options side by side before you settle on one. See the full working capital loans comparison — LOC vs term loan vs MCA vs factoring for a cost breakdown at $50K and $100K across all four products.
Common Mistakes
Treating it like free money. A $100,000 limit isn’t a $100,000 plan. Interest accrues daily — draw only what you need and repay quickly.
Using it for long-term needs. Carry a big draw for years and you’re paying revolving rates where a cheaper term loan belonged. Lines are short-term tools.
Ignoring the renewal. Draw periods end. If your credit or revenue has slipped at renewal, the lender can cut your limit or close the line. Keep your profile strong.
Not having one before you need it. The best time to open a line is when business is good and you don’t urgently need cash. Lenders give better terms to owners applying from strength.
Bottom Line
A line of credit is right for managing short-term, unpredictable cash needs — gaps, seasonality, surprises — where flexibility matters and you’d rather not pay interest on idle money. It’s wrong for long-term, fixed investments, which cost less through a term or SBA loan. The smartest play is to set one up while your business is healthy and keep it as a permanent part of your toolkit, paired with cheaper long-term financing for the big stuff.
Up next: Chapter 5 — Invoice Factoring.
If you have B2B invoices with long payment terms, also read Invoice Factoring vs. Line of Credit: Which Is Better for B2B Cash Flow? — a break-even analysis that shows exactly when each option is cheaper.