Business Line of Credit

What Is a Business Line of Credit?

A business line of credit provides access to capital you can draw from as needed. You only pay interest on what you actually use. As you repay, your available credit replenishes, giving you ongoing financial flexibility.

Think of it as a business credit card on steroids. Unlike term loans where you receive a lump sum and pay interest on the entire amount immediately, a line of credit gives you access to a predetermined credit limit ($10K-$1M) that you can tap whenever needed.

How It Works

• Draw What You Need: Access funds up to your credit limit whenever you need them
• Pay Interest Only on Balance: No interest on unused credit, only what you actually use
• Revolving Access: As you repay, your available credit replenishes automatically

Line of Credit vs. Term Loan

Rule of Thumb: Use term loans for large one-time purchases like equipment or real estate. Use lines of credit for ongoing working capital needs like payroll, inventory, and seasonal cash flow gaps.

Types of Business Lines of Credit

Unsecured Lines

No Collateral Required

• Limits: $10K-$100K
• Rates: 10-25%
• Credit Need: 680+ score
• Approval: Faster process

Best for: Established businesses with strong credit needing smaller amounts

Secured Lines

Requires Collateral (Equipment, Inventory, Receivables)

• Limits: $100K-$1M+
• Rates: Prime + 2-8%
• Credit Need: 600+ score
• Approval: Easier qualification

Best for: Larger credit needs or lower credit scores

SBA CAPLine

SBA-Guaranteed Line (Best Rates, Longest Process)

• Limits: Up to $5M
• Rates: Prime + 2.25-4.75%
• Requirements: SBA standards (680+ credit, 2+ years in business)
• Timeline: 4-8 weeks

Best for: Established businesses needing largest amounts at lowest rates

Qualification Requirements

Credit Score

• 700+: Best terms available
• 650-699: Good options, moderate rates
• 600-649: Limited options, higher rates

Time in Business

• Banks: Want 2+ years established history
• Online lenders: Accept 6+ months in business
• Fintech lenders: Some accept 3+ months with strong revenue

Revenue Requirements

• Minimum annual: $50,000+ for most programs
• Monthly revenue: $10,000+ for online lenders
• Consistency: Lenders want stable, predictable income

Cash Flow and DSCR

• Positive cash flow: Must demonstrate via bank statements
• DSCR 1.25+: Preferred for best terms
• Financial statements: P&L and balance sheet required

Best Uses for a Business Line of Credit

• Seasonal Cash Flow: Cover expenses during slow periods, repay during peak season
• Working Capital: Payroll, rent, inventory restocking, supplier payments
• Time-Sensitive Opportunities: Bulk discounts, limited-time deals, urgent purchases
• Invoice Payment Gaps: Bridge 30-90 day payment cycles from customers
• Unexpected Expenses: Emergency repairs, equipment breakdowns, urgent needs

When NOT to Use a Line of Credit

• Long-Term Investments: Real estate, major equipment. Use term loans instead
• Startups with No Revenue: Difficult to qualify; consider alternatives like equipment financing
• Chronic Losses: Address profitability issues first before taking on debt

Costs and Fees

Interest Rates

• Secured Lines: Prime + 2-6% (10.5-14.5% currently)
• Unsecured Lines: 10-25%+

Interest charged only on outstanding balance.

Common Fees

• Draw Fees: 1-3% per draw or $50-$250 flat fee
• Maintenance Fees: $100-$500 annually or $25-$100 monthly
• Inactivity Fees: $50-$200 if unused for 6-12 months
• Origination Fees: 1-3% of credit line or $500-$2,000
• Late Payment Fees: $25-$50 per occurrence

Application Requirements

Required Documentation

Business Documents:

• Business license and registration
• 2 years tax returns
• 3-6 months bank statements
• Profit and loss statements
• Balance sheet

Personal Documents:

• Personal tax returns (2 years)
• Personal financial statement
• Photo ID
• Social Security number

Collateral (if secured):

• Equipment appraisals
• Inventory listings
• Accounts receivable aging
• Asset documentation

Lender Options and Timelines

• Traditional Banks: 2-4 weeks (best rates, strictest requirements, comprehensive documentation needed)
• Online Lenders: 24-72 hours (faster approval, flexible criteria, higher rates, minimal documentation)
• Credit Unions: 1-3 weeks (competitive rates for members, relationship-focused, community-oriented)
• SBA Lenders: 4-8 weeks (best overall terms, largest limits, longest processing time, strict SBA standards)

Managing Your Line Responsibly

6 Rules for Smart Line of Credit Use

1. Draw Only What You Need: Available credit isn't free money; every dollar drawn costs interest
2. Pay Down Quickly: Less interest paid, faster credit replenishment for future needs
3. Keep Utilization Under 30%: Protects your business credit score and demonstrates discipline
4. Track Fees and Rate Changes: Review statements monthly to catch unexpected charges
5. Maintain Cash Reserves: Don't rely solely on credit; keep emergency fund intact
6. Communicate with Lenders: Address payment issues proactively to maintain good relationship

Credit Utilization Impact: Using more than 30% of your credit line can negatively impact your business credit score, even if you're making on-time payments. Keep utilization low to maintain strong credit and qualify for better terms on future financing.

Looking for different financing options? Learn about small business loan alternatives, or if you need equipment-specific financing, explore our equipment financing guide. Use our financing calculator to compare your options.