Business Line of Credit: How It Works and When to Use It

A business line of credit is one of the most flexible financing tools available to U.S. businesses. Unlike a term loan that provides a lump sum, a line of credit gives you ongoing access to capital you can use, repay, and use again as needed.

What Is a Business Line of Credit?

A business line of credit is a revolving credit facility that works similarly to a credit card. It is designed for short-term working capital rather than long-term investments.

You receive approval for a maximum amount (your credit limit).
You draw funds as needed (up to your limit).
You pay interest only on what you use, not the total limit.
As you repay, credit becomes available again (revolving).

Think of it as a financial safety net that sits in your back pocket.

How a Line of Credit Works

The Basics

Example: You are approved for a $100,000 line of credit.

Day 1: $100,000 available, $0 borrowed.
Day 30: Draw $25,000 for inventory.
- Now: $75,000 available, $25,000 borrowed.
Day 60: Draw another $15,000 for marketing.
- Now: $60,000 available, $40,000 borrowed.
Day 75: Repay $20,000 from sales revenue.
- Now: $80,000 available, $20,000 borrowed.

You only pay interest on the $20,000 currently borrowed.

Interest Calculations

Interest rates for lines of credit are heavily influenced by the current Wall Street Journal (WSJ) Prime Rate. As of early 2026, the Prime Rate hovers around 6.75% to 7.50%.

Variable Rate: This is the most common structure. Your rate is the Prime Rate plus a lender “spread” (usually 1% to 10%). If the Fed raises rates, your cost of borrowing goes up immediately.

Fixed Rate: These are rare and typically found only at online lenders. They provide predictability but often start with a higher baseline rate.

Interest typically accrues daily on the outstanding balance.

Types of Business Lines of Credit

Secured Lines of Credit

These are backed by collateral such as inventory, equipment, real estate, or accounts receivable. Traditional banks like Wells Fargo or Bank of America often require this for larger lines (over $100,000).

Advantages:

Higher credit limits (up to $500,000+).
Lower interest rates (often Prime + 2%).
Easier approval if you have weak credit but strong assets.

Disadvantages:

Risk of losing collateral if you default.
Slower approval (weeks for asset valuation).

Unsecured Lines of Credit

No physical collateral is required. Lenders rely heavily on your business revenue and credit score. Fintech companies like Bluevine or OnDeck specialize in this area.

Advantages:

No assets at risk.
Faster approval (often 24-48 hours).
Simpler application process.

Disadvantages:

Lower credit limits (usually capped at $50k - $100k for new businesses).
Higher interest rates (can exceed 30% APR with online lenders).
Stricter qualification on cash flow.

Asset-Based Lines of Credit

These are specifically tied to receivables or inventory that serve as ongoing collateral.

Best for: Manufacturing or wholesale businesses with significant receivables.

Line of Credit vs. Term Loan

We find that many business owners confuse these two products. This table breaks down the differences clearly.

Factor	Line of Credit	Term Loan
Structure	Revolving (like a credit card)	Lump sum (one-time cash)
Interest	Paid only on amount used	Paid on full loan amount
Repayment	Weekly or monthly (flexible)	Fixed monthly payments
Reusability	Repay and reuse indefinitely	Must reapply once paid off
Best For	Payroll, inventory, cash flow gaps	Equipment, renovations, expansion

When to Use a Line of Credit

Cash Flow Management

You can smooth out timing differences between when you pay expenses and receive revenue.

Example: A construction company buys materials on Day 1 but doesn’t get a draw check until Day 45. The line of credit bridges that specific 45-day gap.

Seasonal Preparation

Stock up for busy seasons before revenue arrives.

Example: A restaurant owner draws $15,000 in October to buy holiday ingredients and repays it in January with the profits.

Emergency Fund

Have capital available for unexpected needs.

Example: An auto repair shop has a lift break down on a Tuesday. They draw from the line to fix it immediately and avoid losing business.

Opportunity Capture

Seize time-sensitive opportunities without delay.

Example: A supplier offers a flash 30% discount for bulk purchases. You use the credit line to buy the inventory and repay as it sells.

Growth Expenses

Fund variable growth costs that don’t justify a term loan.

Example: Marketing campaigns, hiring costs, or small software upgrades.

When NOT to Use a Line of Credit

Major, one-time investments: A term loan with fixed payments is better for buying a $100,000 piece of machinery.

Long-term financing needs: Lines are typically renewed annually. If you carry a balance for years, variable rates can become incredibly expensive.

Covering losses: If your business is consistently unprofitable, a credit line will only dig a deeper hole.

Maximum borrowing indefinitely: Utilizing more than 80% of your limit permanently signals financial distress to lenders.

Qualifying for a Business Line of Credit

Typical Requirements

Credit Score:

Banks: 680+ FICO is standard.
Online Lenders: 600+ FICO is often acceptable (e.g., Fundbox or Headway Capital).

Time in Business:

Banks: Usually 2+ years required.
Online Lenders: Often accept 6 months to 1 year.

Annual Revenue:

Banks: $250,000+ annually.
Online Lenders: $100,000+ annually (or $10,000/month average).

Profitability: Positive cash flow is preferred.

Bank Balance: Consistent positive daily balances are crucial.

What Lenders Evaluate

Revenue consistency: Do you have months with zero income?
Cash flow patterns: How many negative days do you have per month?
Debt-to-income ratio: Can you afford the new payments?
Industry: High-risk industries (like trucking or restaurants) may face higher rates.

Costs and Fees

Interest Rates

Traditional Banks: Prime + 2% to 10% (Approx 9% - 17% APR).
Online Lenders: 20% - 60% APR (Often quoted as “factor rates” or monthly fees).
Secured Lines: Generally lower.
Unsecured Lines: Generally higher.

Common Fees (The “Hidden” Costs)

Draw Fee: This is critical to watch. Some lenders charge 1% to 3% every time you touch the money. If you draw $10,000, you might immediately owe $10,300.

Maintenance Fee: A monthly fee (e.g., $20 - $50) charged if you have a balance.

Inactivity Fee: Charged if the line isn’t used within a period (e.g., $150/year).

Origination Fee: A one-time fee when the line is established.

Always calculate the Total Cost of Capital (Interest + Fees) before signing.

Managing Your Line of Credit

Best Practices

Don’t treat it as free money: Every dollar borrowed cuts into your profit margin.
Maintain discipline: Pay down balances to zero at least once every 12 months. This proves to the bank you aren’t dependent on the debt.
Track your draws: Know exactly which project or expense the money funded.
Keep some available: Aim to keep 30-50% of your line open for true emergencies.
Monitor renewal terms: Banks review lines annually. If your credit score drops, they can freeze the line.

Avoiding Problems

Don’t rely on it for chronic cash shortages.
Make at least minimum payments on time to build business credit.
Keep detailed records of draws and repayments.
Communicate with your lender about any issues.
Understand what triggers a default (like a tax lien).

Getting Started

Step 1: Assess Your Needs

How much credit do you need?
What will you use it for?
Can you repay the draw within 3-6 months?

Step 2: Check Your Qualifications

Review your personal and business credit scores.
Gather 3 months of business bank statements.
Prepare your most recent tax return.

Step 3: Compare Options

Traditional Banks: Chase, Wells Fargo, US Bank (Good for low rates, slow speed).
Credit Unions: Often have lower fees but strict local requirements.
Online Lenders: Bluevine, Fundbox, OnDeck (Good for speed, higher cost).

Step 4: Apply

Submit your application and documentation.
Respond promptly to underwriter requests.
Review the “Truth in Lending” disclosure carefully.

Is a Line of Credit Right for You?

A business line of credit is ideal if:

You have variable or unpredictable capital needs.
You want a financial safety net for peace of mind.
You can handle revolving credit responsibly.
You prefer paying interest only on what you use.

It may not be right if:

You need a specific amount for a large equipment purchase.
You plan to take 3+ years to pay it back.
You lack the discipline to repay consistently.

Explore Your Options

Whether a line of credit fits your needs depends on your specific situation. Contact us to discuss the best financing structure for your business.