How a business line of credit works
Money that sits available until you need it, charging you only for what you actually use. For recurring cash-flow gaps it is usually the right shape.
A line of credit is a revolving limit rather than a lump sum. Approved for $75,000, you might draw $20,000 to cover payroll during a slow month, repay it over the following weeks, and still have the full limit available when the next gap opens. You pay interest on the $20,000, not the $75,000.
Line of credit versus term loan
A term loan lands the entire amount in your account on day one and charges interest on all of it from that moment, with a fixed payment until it is repaid. That is the right structure for a defined one-time purchase: a build-out, a specific piece of equipment, an acquisition.
A line fits a different problem, which is recurring or unpredictable timing gaps. Seasonal businesses drawing through the slow quarter, contractors covering payroll while waiting on a draw, retailers buying inventory ahead of a season. Paying interest year-round on money you needed for six weeks is exactly the waste a line avoids.
What it costs
Rates vary enormously by tier. Bank lines for strong borrowers can run from single digits into the low teens. Online and non-bank lines commonly land anywhere from the high teens into the forties, depending on credit, revenue, and time in business.
Watch the fees, because they are where the real cost often hides. A draw fee applies every time you pull money, so a line used repeatedly costs meaningfully more than the headline rate suggests. Annual or maintenance fees may apply whether or not you borrow, and some lenders charge on the unused portion. Ask directly what you pay in a month where the balance is zero. You can model a specific scenario with the line of credit calculator, which also shows what the same money costs as a factor-rate advance.
See what limit and rate you qualify for
Published ranges are wide because pricing depends on your revenue, time in business, and credit. A specialist can put real numbers in front of you.
See what you qualify for →About 60 seconds. No hard credit pull. One funding partner, not a lead list.
What lenders require
Typically six to twelve months in business for non-bank lenders and two years for banks, consistent monthly revenue, and a credit score generally starting around 600, though revenue-focused lenders work lower. Three to four months of business bank statements do most of the underwriting; see what lenders actually look at and what credit score you need.
Two terms worth asking about before signing. The draw period is how long the line stays open before it must be renewed, and a line that expires just as your season turns is worse than useless. Renewal conditions matter too, since some lenders can reduce or pull a limit if revenue dips, which is precisely when you would want it.
When a line is the wrong tool
If you need a defined lump sum for a one-time purchase, a term loan is usually cheaper and simpler. If the gap is specifically customers paying slowly, invoice or receivables financing addresses that directly and often approves when a line will not. If you need equipment, financing secured by the equipment is generally more accessible and better priced.
And if a line is not available at your current profile, understand why before reaching for the alternative that always approves. A revolving line and a merchant cash advance are frequently pitched to the same business, but the second one carries a fixed daily withdrawal that does not flex when a week goes badly. Compare them honestly using factor rate vs APR before deciding they are interchangeable.
Common questions
What is a business line of credit?
A revolving credit limit you can draw against as needed, repay, and draw again. You pay interest only on the balance you have drawn rather than the full limit, which makes it well suited to recurring or unpredictable cash-flow gaps rather than one-time purchases.
How is a line of credit different from a business loan?
A term loan gives you a lump sum on day one and a fixed payment schedule until it is repaid, and interest runs on the whole amount from the start. A line of credit gives you access to a limit, charges interest only on what you draw, and lets you reuse the room as you repay it.
What do you need to qualify for a business line of credit?
Most non-bank lenders want at least six to twelve months in business, consistent monthly revenue, and a personal credit score generally starting around 600, though revenue-focused lenders go lower. Bank lines require stronger credit and usually two years of history. Three to four months of business bank statements are the core documentation.
Does a business line of credit affect personal credit?
The application usually involves a personal credit check and most small-business lines require a personal guarantee. Whether the account itself reports to consumer bureaus varies by lender; many report only to commercial bureaus. Ask the specific lender if this matters to you.
Is a line of credit good for seasonal businesses?
It is usually the best-fitting product for them. You draw during the slow stretch and repay through the strong one, rather than carrying a fixed payment year-round the way a term loan requires. The key is confirming the draw period does not expire at the moment your season turns.
This page is general education, not financial or legal advice. Rates, fees, and requirements vary by lender and by your specific situation.
See what your business qualifies for
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