Business Lines of Credit

The short version

A business line of credit gives a business access to a maximum credit limit and generally allows repeated draws, repayments, and additional draws while the account remains open and in good standing.

Unlike a term loan, you do not necessarily receive the entire approved amount at once. That can make a line useful for recurring or uneven short-term needs such as inventory, payroll timing, seasonal expenses, or receivables gaps.

How draws and repayment work

When you draw from the line, you create an outstanding balance. Interest or finance charges generally apply to the amount used rather than the full credit limit, although fees and minimum charges can vary by lender.

Some products have monthly payments, while others may use more frequent repayment schedules. Ask how the payment is calculated before accepting an offer.

What to compare

Do not compare lines of credit only by the advertised rate. Review:

• interest rate or other finance charge,
• annual or maintenance fees,
• draw fees,
• unused-line fees if any,
• repayment frequency,
• minimum draw requirements,
• collateral or personal-guarantee requirements,
• renewal terms, and
• circumstances that allow the lender to reduce or close the line.

See Business Loan Rates, Fees, and Total Cost for a broader cost framework.

When a line can fit

A line of credit may be useful when the borrowing need is temporary and recurring rather than a one-time long-term purchase.

Examples include:

• purchasing inventory before a seasonal sales period,
• covering payroll while waiting for receivables,
• handling a short operating-expense gap, or
• maintaining flexible access to working capital.

For a one-time asset purchase, an equipment loan or other term financing may be easier to match to the useful life of the asset.

Risks to watch

A revolving line can be convenient enough that a business begins using it to cover an ongoing structural cash-flow deficit. That can create a persistent balance instead of solving the underlying operating problem.

Also confirm whether the rate is variable, whether the lender can require a clean-up period, and whether the line must be renewed periodically.

Questions to ask a lender

• How is the borrowing cost calculated?
• Which fees apply even if I do not draw?
• How often are payments due?
• Is the rate fixed or variable?
• Is collateral required?
• Is a personal guarantee required?
• How often is the line reviewed or renewed?
• Can the credit limit be reduced after approval?

Sources and verification

This guide follows general small-business financing guidance from the U.S. Small Business Administration and emphasizes comparing the actual lender agreement because line-of-credit structures vary widely.

Next steps

Use the Business Funding comparison page to compare lines of credit with term loans, SBA-backed financing, equipment financing, and other working-capital options.