A business line of credit is a pre-approved borrowing limit you can draw from, repay and draw from again, paying interest only on what you have taken out. It is the difference between having $75,000 available and having $75,000 of debt, and that difference is the entire point of the product.
A term loan hands you the full amount on day one and starts the interest clock on all of it. A line of credit sits at zero until you need it. If you draw $12,000 in March to cover a slow month and repay it in May, you have paid interest on $12,000 for two months and nothing else. The limit replenishes as you repay, which is why these are called revolving facilities.
That structure makes a line of credit the right tool for one specific kind of problem, a gap that opens and closes, and the wrong tool for a purchase. Knowing which of those you have in front of you is most of the decision.
The Bottom Line
- You pay interest only on what you draw. An unused line costs you a maintenance fee, not interest.
- Rates split sharply by lender type: bank lines typically run 8% to 14% APR, online lenders 12% to 22% (Bay Street Lending).
- Fees change the real cost. Draw fees of 1% to 3% plus a monthly maintenance charge can push a headline 12% rate to an effective 15% to 17% on a one-year payoff (Lendio).
- Typical minimum thresholds for approval are six months in business, around $25,000 in annual revenue, and a credit score above 500 for the more permissive online lenders (PayPal).
- Use it for timing gaps that close: seasonal dips, a large order’s upfront costs, an emergency repair. Do not use it for a permanent shortfall or a long-lived asset.
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How a business line of credit works, draw by draw
Four stages, and only the first involves an application.
Approval. A lender sets a maximum limit based on revenue, time in business, credit profile and sometimes collateral. Nothing is borrowed yet, and on most products nothing is owed.
Draw. You request funds, usually through a portal, and they arrive in your business account within a day or two. Some lenders charge a draw fee here, typically 1% to 3% of the amount (Lendio).
Repayment. You make payments on the drawn balance. Interest accrues only on that balance. Some lenders bill weekly, which matters for cash planning more than owners expect.
Replenishment. As you repay principal, that amount becomes available again. Draw $30,000 on a $75,000 line, repay $10,000, and you have $55,000 available.
A worked example for a florist. The line is $50,000. In January, after the holiday rush ends, the business draws $18,000 to cover rent, payroll and a pre-order of Valentine’s stock. Through February and March the receipts come in and the balance is repaid. The business paid interest on $18,000 for roughly 70 days (at 14% APR, around $480) and the limit is back to $50,000 before Mother’s Day.
Compare that to a $50,000 term loan taken in January to solve the same problem: interest on the full amount for the full term, whether or not the money was needed after March.
Revolving versus non-revolving, and why it matters
Most business lines are revolving. Some are not: a non-revolving line pays out in draws, but repaid principal does not become available again. It behaves like a loan disbursed in stages.
Check this before signing. A non-revolving line will not solve a recurring seasonal gap, because the second time the gap opens the money is gone.
Also check whether the line is demand or committed. A demand facility can be reduced or withdrawn by the lender with little notice, which is exactly when businesses discover their safety net was conditional. A committed facility holds for a stated term and usually costs more.
Secured and unsecured lines of credit
A secured line is backed by collateral: commercial property, equipment, inventory or receivables. A lender with recourse to an asset will offer a higher limit and a lower rate. The risk is straightforward: default and the asset is at stake.
An unsecured line has no specific collateral, so limits are smaller and rates higher. It almost always carries a personal guarantee, which means the owner is on the hook personally even though the borrower is the business. Owners routinely read “unsecured” as “no personal risk,” and it does not mean that.
A practical split: unsecured lines in the $25,000 to $250,000 range at 12% to 22% APR suit newer businesses with credit scores in the 600 to 680 band, while banks offer lower rates to borrowers with two or more years of history and stronger credit (Bay Street Lending).
What a business line of credit actually costs
The headline rate is the smaller part of the answer.
| Cost | Typical range | When it applies |
|---|---|---|
| Interest (APR) | 8%-14% bank, 12%-22% online | On the drawn balance only |
| Draw fee | 1%-3% of the draw | Each time you take funds |
| Maintenance / annual fee | $25-$150 monthly, or $95-$175 a year | Whether or not you draw |
| Origination fee | 0%-3% of the limit | At approval, on some products |
| Late fee | Flat or percentage | On missed payments |
Sources: Lendio, Bay Street Lending.
The combination matters more than any single line. On a $40,000 draw repaid over twelve months, a 12% headline rate plus a 2% draw fee and a $50 monthly maintenance charge produces an effective cost closer to 15% to 17% (Lendio).
Two things follow. First, ask for the effective APR on a realistic draw scenario rather than the advertised rate. Second, a facility you draw on frequently in small amounts is expensive if there is a per-draw fee, so in that case fewer, larger draws cost less.
The interest and the fees are both deductible business expenses, which takes some of the edge off the real cost. The principal is not. Our guide to business tax deductions owners most often miss covers how business interest is claimed, along with the other financing costs that get left off a return.
When a business line of credit is the right tool
The test is whether the gap closes on its own. A line of credit funds timing, not deficits.
Good fits:
- Seasonal troughs: a caterer in January, a florist in July, a wholesaler between holiday cycles. Known, recurring, and self-correcting.
- The working capital gap on a large order: a $90,000 contract that needs $35,000 of stock and labour before the invoice is paid at day 45. The line bridges the gap and the contract repays it.
- Emergency repairs: a van off the road or a walk-in freezer failing is a revenue problem that becomes a cash problem within days. Having a line already open is what turns a crisis into an inconvenience.
- Payroll smoothing through a known dip, where the receipts are contracted and simply late.
- Taking a supplier’s early-payment discount when the discount exceeds the cost of the draw. Run the arithmetic both ways; sometimes it works, often it does not.
Bad fits:
- A permanent shortfall: if the gap never closes, borrowing makes a structural problem more expensive. The cause is usually in the cash conversion cycle, and our guide to shortening the cash conversion cycle through receivables, inventory and payables is the right place to start instead.
- Buying a long-lived asset: a van or a walk-in cooler should be matched to financing of a similar length. Funding a seven-year asset on a revolving facility means repaying it long before the asset is finished earning.
- Covering a tax bill you could have planned for: occasionally unavoidable, but quarterly estimates are predictable, and our quarter-by-quarter business tax planning guide covers the safe harbor calculation that makes the amount knowable in April.
- Funding losses while hoping for a turnaround: a line of credit buys time, not a business model.
How a line of credit compares to the alternatives
| Option | Best for | Cost shape | Main drawback |
|---|---|---|---|
| Business line of credit | Recurring timing gaps | Interest on drawn balance plus fees | Variable rate; can be reduced on demand facilities |
| Term loan | Equipment, expansion, a one-off project | Fixed payment over a fixed term | Interest on the full amount from day one |
| Business credit card | Small recurring purchases | Free inside the grace period, expensive after | Low limits; high APR on carried balances |
| Invoice financing | Heavy receivables, slow-paying accounts | Fee per invoice advanced | Cost rises with how long the customer takes |
| Merchant cash advance | Fast access, weak credit | A share of daily card receipts | Effective rates often far above a line of credit |
The honest comparison for most owners is the first two rows. If you know the exact amount and it buys something durable, a term loan is usually cheaper. If you do not know the amount or the timing, a line of credit is worth its premium precisely because it is flexible.
What lenders look at, and how to improve your odds
The entry requirements at the more permissive end are lower than most owners assume: roughly six months of operating history, around $25,000 in annual revenue, and a credit score of 500 or above (PayPal). Bank lines ask for considerably more. Two years of history and credit in the high 600s is a common floor.
Expect to supply revenue history, recent business tax returns, bank statements, a balance sheet and a profit and loss statement. Lenders generally want to see six months of operation before considering an application.
Four things that measurably help:
- Apply before you need it: the best time is a strong quarter, not a desperate one. Lenders price on recent performance, and an open unused line costs little.
- Separate business and personal finances: clean business bank statements are the single easiest underwriting improvement, and they make the tax side simpler too.
- Keep books current: a lender asking for a P&L you cannot produce in a week is reading that as risk.
- Build the relationship at your existing bank: an institution that has watched your deposits for three years has information no new lender has.
Using the line without getting stuck on it
A line of credit becomes a problem when the balance stops going to zero.
A few disciplines that keep it healthy. Decide in advance what the line is for and write it down, so the decision is not made in a bad week. Return to zero at least once a year. If you cannot, the facility is funding a structural gap rather than a timing one, and that needs fixing somewhere other than a lender’s office. Watch the variable rate, because most lines are tied to a benchmark and a 300-basis-point move changes your carrying cost materially. And read the terms on reduction rights before you rely on the limit as a safety net.
Frequently asked questions
What credit score do I need for a business line of credit?
Online lenders will consider scores from around 500, with the better rates and limits going to the 600 to 680 band (PayPal). Banks generally want 680 or above along with two years of operating history.
Does an unused business line of credit cost anything?
Usually a maintenance or annual fee, commonly $25 to $150 a month or $95 to $175 a year depending on the limit, but no interest, because interest applies only to drawn balances (Lendio).
Is a business line of credit better than a business credit card?
They solve different problems. A card is better for small recurring purchases and is effectively free inside the grace period. A line of credit is better for larger amounts over several months, because the rate is lower than a carried card balance and funds arrive as cash rather than as purchasing power.
How quickly can I get a business line of credit?
Online lenders commonly approve within one to three business days, with funds available shortly after. Bank applications take one to several weeks because the documentation requirement is heavier.
Can I get a business line of credit as a new business?
With six months of trading history and about $25,000 in annual revenue, yes, through online lenders at higher rates (PayPal). Below six months the realistic options are a business credit card or a personal guarantee against personal credit, both of which should be approached carefully.
What happens if I never draw on the line?
Nothing, beyond the maintenance fee. That is a reasonable outcome, because an unused facility is insurance against the month a van’s transmission fails, and the fee is the premium.
Where to start
Work out which problem you have. Write down the amount, the month you would need it, and the month it would be repaid. If you cannot name the repayment month, the issue is not a timing gap and borrowing will not fix it.
If you can, apply during a strong quarter rather than a weak one, ask every lender for the effective APR on a realistic draw rather than the headline rate, and confirm whether the facility is revolving and committed. Those three questions separate a line of credit that works as a safety net from one that becomes a permanent balance.
