When expenses and revenue don’t align, many businesses use short-term financing to bridge the gap. In many cases, a business line of credit can offer flexible access to capital for recurring or unexpected business expenses.
How does a business line of credit work? Simply put, instead of providing a lump sum of capital upfront, a line of credit sets an approved credit limit that businesses can draw on as needed.
Understanding how lines of credit work can help you decide whether they might offer the right solution for your business’s needs.
What is a business line of credit?
A business line of credit*, or revolving line of credit, is a financing option that allows a business to borrow up to an approved limit. Unlike a traditional business loan, which provides a set amount of money with a defined repayment schedule, a line of credit offers ongoing access to funds, and you generally pay interest only on the amount you draw, not the full credit limit.
Common business line of credit uses include:
- Managing seasonal changes in revenue
- Purchasing inventory before a busy period
- Covering short-term operating expenses
- Handling unexpected costs
How does a business line of credit work?
Understanding how a business line of credit works starts with four basic steps:
- Application and approval: A financing provider reviews your application, financial information, and eligibility factors to determine whether you qualify and what credit limit may be appropriate.
- Accessing funds: Once approved, you can draw funds up to your available limit according to the agreement terms.
- Repayment: You repay the amount you borrow, along with applicable interest and fees.
- Available credit replenishes: As you repay what you’ve drawn, your available credit may increase again, depending on the agreement.
For example, say a business receives a $50,000 line of credit. If the owner uses $10,000 to purchase inventory, the remaining $40,000 credit remains available for future needs. After repaying the borrowed amount, plus any interest and fees, your available credit may replenish, allowing you to draw on the full $50,000 limit again if needed.
The cost of a line of credit typically depends on the amount drawn, interest rate, fees, and repayment terms. Because you don’t pay interest on unused funds, this option can help businesses access capital without borrowing more than they need.
Secured vs. unsecured business lines of credit
A business line of credit can be secured or unsecured.
- A secured line of credit requires collateral — a business asset used to support the financing agreement. If the business does not meet its obligations, the lender may have rights related to that collateral.
- An unsecured line of credit does not require a specific asset as collateral, although the provider may still require a personal guarantee, UCC filing, or other agreement depending on the product.
Generally, secured financing may provide different qualification requirements or pricing because collateral can reduce risk for the financing provider. Unsecured options may offer more flexibility but may have higher rates and eligibility standards.
Learn more about unsecured business loans and how to read a business financing agreement.
How much can you get with a business line of credit?
The maximum credit limit depends on the financing provider. Some providers offer smaller lines for short-term needs, while others offer larger limits for established businesses with strong financial performance.
The credit limit available to your business may depend on factors such as:
- Business revenue
- Time in business
- Credit history
- Existing obligations
- Cash flow
- Overall financial health
The amount you qualify for matters, but it is only one part of the decision. The goal is to choose a credit limit that supports your business without straining cash flow.
Business line of credit rates, fees, and repayment
The cost of a business line of credit varies by provider and agreement. Before accepting an offer, review:
- Interest rate or APR
- Draw fees
- Origination or maintenance fees, if applicable
- Repayment schedule
- Minimum payment requirements
- Any renewal or account fees
Many lines of credit use variable interest rates, meaning the cost of borrowing may change over time. Payment frequency also varies. Some providers require weekly payments and others offer monthly repayment schedules.
Keep in mind that a lower advertised rate does not always mean a lower overall cost. Review the complete agreement to understand the cost of borrowing in actual dollars.
Business line of credit requirements and documents
Common factors reviewed during underwriting may include:
- Credit history
- Revenue and bank deposits
- Time in business
- Existing debt obligations
- Business performance trends
Applicants are often asked to provide documents such as:
- Business bank statements
- Identification documents
- Business formation information
- Revenue records
- Details about existing financing
Requirements vary by provider and product, but having organized financial information can make the application process smoother. Learn more about small business loan qualifications.
Where can you get a business line of credit?
Lines of credit are typically offered by banks, credit unions, and online financing providers.
- Traditional banks and credit unions may offer competitive rates for highly qualified borrowers, but their application processes can involve more documentation, longer review periods, and stricter eligibility requirements.
- Online financing providers may offer a more streamlined application experience and different qualification criteria. However, businesses should still compare total costs, terms, and repayment expectations before choosing an option.
A direct business lender can offer a more streamlined process for its own financing products, while marketplaces allow businesses to connect with multiple providers.
When is a line of credit better than a business loan?
A line of credit can be a good fit when your business has recurring or unpredictable financing needs. For example, a line of credit can help with:
- Buying inventory before a busy period
- Seasonal cash flow changes
- Short-term operating expenses
- Addressing smaller expenses as they arise
A traditional short- or long-term loan may be a better fit when you have one defined expense with a clear cost, such as purchasing equipment or funding a major expansion.
Compare business lines of credit vs. loans to understand some potential pros and cons of a business line of credit based on your needs.
How to compare business line of credit offers
Before accepting a line of credit, look at the entire offer, not just the available limit. Consider:
- Total cost of borrowing
- Interest rate or APR
- Fees
- Draw requirements
- Repayment frequency
- Renewal terms
- Collateral or personal guarantee requirements
- Credit reporting practices
A financing agreement should clearly explain what you receive, what you pay, and what is expected throughout the relationship.
How to apply for a business line of credit
Before applying, define what you need the financing for. Knowing what you want to accomplish can help you determine the right amount and structure.
A typical application process follows these steps:
- Review eligibility requirements.
- Gather financial documents.
- Submit an application.
- Review available offers.
- Compare costs and terms.
- Review and sign an agreement.
For additional guidance, explore our guide on how to get a small business loan.
Business line of credit options through Credibly
Credibly helps small and medium-sized businesses explore financing options based on their needs and financial situation.
Businesses can explore line-of-credit options through our external funding partners, as well as direct financing products from Credibly, such as Working Capital Loans and Merchant Cash Advances**.
Because different financing products have different structures, compare each option carefully to find one that fits your business.
Frequently asked questions
Will prequalifying for a business line of credit hurt my credit score?
The credit inquiry process varies by provider. Credibly performs a soft credit pull during the application process, which does not affect your credit score.
Can I leave a business line of credit open without using it?
Depending on the agreement, you may be able to keep a line of credit open without drawing funds. Make sure to review any account maintenance requirements or fees.
Does an unused business line of credit affect my business credit?
Credit reporting practices vary. Before accepting an offer, ask the provider how an open or unused line may be reported.
Can my credit limit increase after I build a repayment history?
Some providers may offer increases based on business performance and repayment history, but increases are not guaranteed.
Can a business have more than one line of credit at the same time?
Yes, it’s possible to have multiple lines of credit. However, eligibility may depend on your business’s performance, cash flow, and any restrictions or covenants included in your current obligations.
How soon can I borrow again after I repay a draw?
With revolving credit products, you can usually borrow again within a period from minutes to a few business days after repayment. Review the terms of your agreement for details.
Does a business line of credit expire or need to be renewed?
Some lines of credit have renewal periods or expiration dates. Review the agreement to understand how long you’ll have access to the capital.
Can a seasonal business qualify for a line of credit?
Seasonal businesses may qualify for a business line of credit. Underwriters typically look at your total revenue, not just what you make in a single slow month.
Can I use a business line of credit for payroll, inventory, or taxes?
Yes, you can typically use a business line of credit for payroll, inventory, and taxes, but you should confirm permitted uses with your financing provider.
What should I do before making my first draw on a new line of credit?
Review the amount you plan to borrow, the repayment impact, fees, and how the expense supports your business goals.
*Some products are made available through the Credibly network of external funding partners.
**Credibly merchant cash advances and working capital loans to merchants in California are provided by Retail Capital LLC. All other Credibly products in all other jurisdictions are provided by Credibly or Arizona LLC.
