A $50,000 emergency repair bill hits on a Tuesday. Your biggest client pays 60 days late. Seasonal inventory needs to be ordered three months before a single sale comes in. These aren't hypothetical scenarios — they're the daily reality of running a business.
A business line of credit exists for exactly these moments. It gives you access to a set pool of funds you can draw from when you need them, pay back, and draw from again. You only pay interest on what you use. Think of it as a financial safety net that stays open, ready for whatever your business throws at you.
[CALLOUT-NOTE: A business line of credit is revolving. You borrow, repay, and borrow again — unlike a term loan, which gives you one lump sum and one repayment schedule.]
This guide breaks down how business lines of credit actually work, what they cost, how to qualify, and when they make sense over other funding options. No jargon. No filler. Just the stuff you need to make a decision.
How a Business Line of Credit Works
The mechanics are straightforward.
A lender approves you for a maximum credit limit — say $100,000. You don't take the full amount. Instead, you pull what you need, when you need it. Draw $30,000 to cover payroll during a slow month. Pay it back over the next 90 days. Your full $100,000 is available again.
Interest applies only to the amount you've drawn, not the total credit limit. If you have a $100,000 line and draw $30,000 at 10% annual interest, you're paying interest on $30,000. The remaining $70,000 sitting untouched costs you nothing (unless your lender charges a maintenance fee — more on that shortly).
You only pay interest on what you draw. A $100,000 line with a $30,000 draw at 10% annual interest costs roughly $3,000/year — not $10,000.
Secured vs. Unsecured Lines of Credit
Two main categories:
Secured lines require collateral — equipment, inventory, real estate, or accounts receivable. Because the lender has something to seize if you default, secured lines come with lower interest rates and higher credit limits. Rates typically range from 7% to 15%.
Unsecured lines require no collateral. The lender relies on your creditworthiness, revenue history, and business financials. The trade-off: higher interest rates (typically 10% to 25%) and lower credit limits.
Most businesses with less than two years of operating history will need collateral. If you've been profitable for three or more years with clean credit, unsecured options open up.
[CALLOUT-TIP: If you're choosing between a secured and unsecured line, run the math on total interest cost over 12 months. A secured line at 8% on $50,000 saves you $4,250/year compared to an unsecured line at 16.5%.]
How Draws and Repayments Work
Drawing funds works differently depending on the lender. Some issue a linked debit card or checkbook. Others transfer funds directly to your business bank account within 24 hours. Online lenders often let you initiate draws through a dashboard with same-day funding.
Repayment structures vary too:
- Interest-only payments during the draw period, with principal due later
- Fixed monthly payments that combine principal and interest
- Daily or weekly auto-debits, common with online lenders — typically 1%–3% of the outstanding balance
Ask your lender about the repayment structure before signing. Daily auto-debits can strain cash flow if you're not expecting them.
What It Actually Costs
The sticker rate doesn't tell the whole story. Business lines of credit carry several cost layers.
Interest rates range from 7% to 25%, depending on your credit profile, revenue, time in business, and whether the line is secured.
Draw fees — some lenders charge 1% to 2% of each draw amount. Pull $20,000 with a 1.5% draw fee and you're paying $300 before interest even starts.
Annual or monthly maintenance fees keep your line open even when you're not using it. These range from $25/month to $175/year.
Origination fees — one-time charges of 0.5% to 3% of your total credit limit, due at signing.
According to the Federal Reserve's 2024 Small Business Credit Survey, 40% of small businesses that applied for a line of credit received less than the full amount requested. Knowing total costs upfront helps you decide whether a partial approval still makes financial sense.
Here's a real-world comparison:
| Cost Component | Bank LOC ($100K) | Online Lender LOC ($100K) |
|---|---|---|
| Interest Rate | 8.5% | 18% |
| Draw Fee | None | 1.5% |
| Annual Fee | $150 | None |
| Origination Fee | 0.5% ($500) | 2% ($2,000) |
| Cost on $40K draw (12 months) | ~$3,550 | ~$9,800 |
The bank line costs less than half. But the bank takes 4–6 weeks to approve and requires extensive documentation. The online lender funds in 48 hours with minimal paperwork. Your situation determines which trade-off matters more.
Who Qualifies — And Who Doesn't
Qualification requirements depend on the lender type. Here's where the lines get drawn.
Bank and Credit Union Requirements
- Credit score: 680+ (many prefer 700+)
- Time in business: 2+ years
- Annual revenue: $200,000+
- Documentation: Tax returns, profit/loss statements, balance sheets, bank statements, business plan
- Approval timeline: 2–6 weeks
Online Lender Requirements
- Credit score: 580+ (some go as low as 550)
- Time in business: 6+ months
- Annual revenue: $50,000+
- Documentation: Bank statements (3–6 months), basic business information
- Approval timeline: 24–72 hours
SBA Lines of Credit (CAPLines)
The SBA's CAPLine program offers lines of credit up to $5 million through participating lenders. Rates are tied to the prime rate plus 2.25%–4.75%. Approval takes 30–90 days and requires extensive documentation including business financial projections.
[CALLOUT-INSIGHT: Your personal credit score matters even for business lines of credit. According to Nav's 2024 data, business owners with personal scores above 720 received interest rates 6–9 percentage points lower than those with scores between 580 and 650.]
If you've been turned down by a bank, an online lender isn't your only option. The problem-solution framework applies here: identify exactly why you were denied — credit score, time in business, revenue, or documentation gaps — and fix the specific issue before reapplying.
When a Business Line of Credit Makes Sense
A line of credit isn't the right tool for every situation. It excels at solving specific cash flow problems.
Cash Flow Gaps
67% of small businesses experience cash flow inconsistencies, according to a 2023 QuickBooks survey. If your business bills clients on net-30 or net-60 terms, you've got expenses due before revenue arrives. A line of credit bridges that gap without forcing you to take on a fixed-term loan you might not need for more than a few weeks.
Seasonal Businesses
Landscaping companies, retail stores, tourism operators — any business with a high season and a dead season. A landscaping company might draw $40,000 in February and March to hire crews and buy equipment, then repay it from June through September revenue.
Emergency Expenses
Equipment breaks down. A roof leaks. A key supplier demands payment upfront instead of net-30. These situations demand fast access to capital. Having a line of credit already approved and in place means you're not scrambling to apply for funding during a crisis.
Opportunity Purchases
A supplier offers 15% off a bulk order, but only if you pay within 10 days. A competitor closes and their equipment goes to auction. Your line of credit lets you move fast.
[CALLOUT-WARNING: Don't use a line of credit for long-term investments like real estate, major equipment, or business acquisitions. The revolving nature and variable rates make it more expensive than a fixed-term loan for anything you'd repay over 2+ years.]
When It Doesn't Make Sense
A line of credit becomes a trap when used for the wrong purposes.
Covering ongoing operating losses. If your business consistently spends more than it earns, a line of credit just delays the problem while adding interest costs. Fix the underlying issue first.
Large, one-time purchases. Buying a $200,000 piece of equipment? A term loan or equipment financing will give you a lower rate and predictable payments. Lines of credit are built for short-term, recurring needs.
When you can't repay within 6–12 months. If a draw will take you 18+ months to repay, the variable interest rate on a line of credit will likely cost you more than a fixed-rate loan.
This is where the problem-solution framework comes back: match the funding tool to the actual problem. Short-term, recurring cash needs call for a line of credit. Long-term, predictable capital needs call for term financing.
How to Apply: Step by Step
Step 1: Check Your Credit
Pull your personal credit report (free at AnnualCreditReport.com) and your business credit report from Dun & Bradstreet, Experian Business, or Equifax Business. Dispute any errors before applying. A single reporting error can drop your score 20–50 points.
Step 2: Gather Documentation
At minimum, prepare:
- 3–6 months of business bank statements
- Most recent business tax return
- Profit and loss statement (year-to-date)
- Balance sheet
- Business license and formation documents
Banks will ask for more. Online lenders may need only bank statements and a basic application.
Step 3: Compare Lenders
Don't apply to just one. Get quotes from at least three sources:
- Your existing business bank (relationship advantage)
- A credit union (often lower rates for members)
- An online lender (faster approval, less documentation)
Compare APR (not just interest rate), fees, draw limits, repayment terms, and renewal policies.
Step 4: Apply
Most online applications take 15–30 minutes. Bank applications may require an in-person meeting. Submit all documentation upfront to avoid delays.
Step 5: Review Terms Before Signing
Read the full agreement. Look specifically for:
- Variable vs. fixed rate
- Rate caps (maximum rate the lender can charge)
- Auto-renewal terms
- Early closure fees
- Personal guarantee requirements
Need fast access to business funding without the runaround? FundLocal connects you with lines of credit and other funding options in minutes, not weeks. Check your options today.
Get Your RateBusiness Line of Credit vs. Other Funding Options
| Feature | Line of Credit | Term Loan | Business Credit Card | Invoice Factoring |
|---|---|---|---|---|
| Best For | Recurring short-term needs | One-time large purchases | Small daily expenses | Businesses with slow-paying clients |
| Typical Amount | $10K–$500K | $25K–$5M | $5K–$50K | Up to 90% of invoice value |
| Interest/Cost | 7%–25% APR | 6%–30% APR | 15%–25% APR | 1%–5% per invoice |
| Repayment | Revolving | Fixed monthly | Revolving | Deducted from client payment |
| Speed | 1–42 days | 2–60 days | Instant (if approved) | 1–7 days |
| Collateral | Sometimes | Often | No | Invoices serve as collateral |
A line of credit wins when your needs are unpredictable, short-term, and recurring. A term loan wins when you know exactly how much you need and can commit to fixed payments. Credit cards work for small purchases where you can pay the full balance monthly. Invoice factoring works when slow-paying clients are your main cash flow problem.
Common Mistakes to Avoid
Maxing out your line. Using more than 70% of your credit limit hurts your business credit utilization ratio, which can lower your credit score and make it harder to get future funding.
Ignoring variable rate risk. If your line has a variable rate tied to the prime rate, a 2% prime rate increase on a $75,000 balance adds $1,500/year in interest. Ask about rate caps.
Treating it as permanent capital. A line of credit should be drawn and repaid in cycles. If your balance never decreases, you're using the wrong product.
Not reading renewal terms. Many lines of credit have 12- or 24-month terms. Some auto-renew. Others require reapplication and re-qualification. Know which one you have before your term expires.
Skipping the personal guarantee fine print. Most small business lines of credit require a personal guarantee. That means your personal assets — home, savings, vehicles — are at risk if the business can't repay. Understand this before signing.
"A line of credit is a tool, not a strategy. The strategy is knowing exactly when to use it and when to put it back in the toolbox."
Building Toward Better Terms
Your first line of credit probably won't have the best rate or the highest limit. That's normal. Here's how to improve your position over time:
Use it and repay it consistently. Lenders reward demonstrated borrowing behavior. Drawing $10,000 and repaying it on time four times in a year shows you're reliable.
Request credit limit increases after 6–12 months. If you've maintained your account in good standing, most lenders will consider increasing your limit without a full reapplication.
Build your business credit profile. Pay all vendors and creditors on time. Register with Dun & Bradstreet and establish a PAYDEX score. A PAYDEX score above 80 opens doors to better terms.
Reduce personal credit utilization. Your personal credit still factors into most business credit decisions. Keep personal credit card balances below 30% of limits.
Grow revenue. Higher revenue = higher credit limits and better rates. Lenders want to see that your business can comfortably service the debt.
The Bottom Line
Key Takeaway
A business line of credit gives you flexible, reusable access to capital for short-term needs. It works best for cash flow gaps, seasonal expenses, emergencies, and time-sensitive opportunities. It's the wrong tool for long-term investments or covering persistent losses.
Here's what to do this week: pull your credit reports, gather your last three months of bank statements, and get quotes from three lenders. The application process for most online lenders takes less than 30 minutes. You don't need to draw a single dollar — just having an approved line of credit in place before you need it puts you ahead of the 82% of businesses that fail due to cash flow problems (U.S. Bank study).
Stop waiting for the emergency to hit before you look for funding.
FundLocal makes business funding simple. No runaround. No weeks of waiting. See what you qualify for in minutes — check your options now at FundLocal.com.
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