What is a Business Line of Credit?
Learn what a business line of credit is, how it works, and when revolving credit makes more sense than a traditional term loan.
A business line of credit is a flexible financing option that gives you access to a set amount of funds you can draw from as needed. Unlike a term loan where you receive a lump sum, a line of credit lets you borrow only what you need, when you need it.
How Lines of Credit Work
When approved for a line of credit, you receive a credit limit — say $100,000. You can draw any amount up to that limit. You only pay interest on what you actually borrow, not the full credit limit.
As you repay what you borrowed, that amount becomes available again. This revolving structure makes lines of credit ideal for ongoing working capital needs.
Key Terms to Know
Business lines of credit typically include these features:
- Credit limit: Maximum amount available to borrow
- Draw period: Time frame during which you can access funds (often 12-24 months)
- Interest rate: Usually variable, based on prime rate plus a margin
- Draw fee: Some lenders charge a small fee (1-2%) each time you draw funds
- Maintenance fee: Annual or monthly fee to keep the line open
- Minimum draw: Some lines require you to borrow at least a certain amount per draw
Secured vs. Unsecured Lines
Lines of credit can be secured (backed by collateral) or unsecured (based on creditworthiness alone). Secured lines typically offer higher limits and lower rates, while unsecured lines provide faster access but often cost more.
Typical Rates
Bank lines of credit typically range from prime + 1% to prime + 5% for well-qualified borrowers. Online lenders may charge 10% to 50%+ depending on your credit profile and business strength.
When to Use a Line of Credit
Lines of credit work best for:
- Managing cash flow gaps between paying suppliers and receiving customer payments
- Covering seasonal fluctuations in revenue or expenses
- Taking advantage of supplier discounts by paying early
- Handling unexpected expenses without depleting cash reserves
- Financing ongoing inventory purchases
Line of Credit vs. Term Loan
If you need funds for a one-time purchase with a known cost — like equipment or real estate — a term loan makes more sense. Lines of credit are better when you have recurring or unpredictable funding needs.
Many businesses maintain a line of credit as a financial safety net while using term loans for major investments.
Apply for a line of credit when your business is doing well — approval is easier, and rates are better. Having a line in place before you need it gives you options when cash flow tightens.
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Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
Third-Party Lenders: All loan products are offered by independent third-party lenders. Liminal Lending Co. is an Independent Sales Organization (ISO) and receives compensation from lenders for successful referrals. Terms and conditions of any loan are between you and the lender.
Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.