A business line of credit is a revolving funding arrangement that gives your company a set credit limit you can draw from, repay, and draw from again, paying interest only on the balance you actually use. Unlike a term loan that lands as one lump sum, a line of credit stays open in the background so you can pull cash the day a payroll run, an inventory order, or a slow receivable creates a gap, then pay it back down as deposits catch up. It is the tool most owners reach for when the problem is timing rather than a single large purchase, and it is judged primarily on your business's cash flow, revenue history, and credit profile.
Key takeaways
- A business line of credit is revolving: you draw, repay, and redraw against a set limit, and pay interest only on the balance you actually use.
- Bank and prime online lines typically want strong credit (often 650+) and two-plus years in business; online lenders may go to six to twelve months.
- An undrawn line usually costs little beyond a maintenance fee, making it inexpensive standby capacity before an emergency hits.
- Lines fit timing-driven, recurring gaps; a single defined purchase is better served by a term loan.
- Business bank statements and consistent revenue are the core underwriting exhibits for any line.
- When a bank line is out of reach, revenue-based funding underwrites on deposits and revenue, works with FICO 500+, starts around $10,000, and often funds in 24 to 48 hours.
- No legitimate funder guarantees approval before reviewing your bank statements.
How a business line of credit actually works
Think of a line of credit as a reservoir you fill and empty on your own schedule. A lender approves a maximum limit, say $50,000 for example, and you decide when and how much to draw against it. Each draw creates a balance that accrues interest; each repayment frees that room back up. This revolving mechanic is the whole point, and it is what separates a line from a term loan.
- Draw period: The window during which you can pull funds. Draws typically hit your bank account within a day or two, and many lenders let you draw from a dashboard or app.
- Interest on the balance only: If you have a $50,000 limit but only $8,000 drawn, you carry cost on the $8,000, not the full limit. An undrawn line generally costs little or nothing beyond any maintenance fee.
- Repay and reuse: As you pay principal back, that capacity is available again without a new application. This is the reusability that makes a line efficient for recurring, unpredictable needs.
- Secured vs. unsecured: Secured lines are backed by collateral such as receivables or equipment and tend to carry lower rates and higher limits. Unsecured lines rely on your credit and cash flow and are faster to open but usually smaller.
The trade-off for that flexibility is discipline. A line rewards owners who draw for a clear, short-cycle purpose and pay it back down; it punishes those who let a revolving balance harden into permanent debt.
Line of credit vs. term loan vs. revenue-based funding
Choosing the right structure starts with the shape of the need. A one-time, defined expense fits a term loan. A recurring or unpredictable cash-flow gap fits a line. And when a business can't clear traditional underwriting but has steady deposits, revenue-based funding fills the gap.
| Feature | Line of credit | Term loan | Revenue-based funding |
|---|---|---|---|
| How funds arrive | Draw as needed, repeatedly | One lump sum | One lump sum |
| Best for | Recurring or timing-driven gaps | A single planned purchase | Fast cash when banks decline |
| Primary approval basis | Credit + cash flow (+ collateral if secured) | Credit, time in business, financials | Bank deposits and revenue over credit |
| Typical speed | Days to weeks to open | Days to weeks | Often 24 to 48 hours |
| Reusable? | Yes | No | No (reapply or renew) |
| Typical credit bar | Higher (often 650+ for bank lines) | Higher | FICO 500+ |
For a wider comparison of every structure, see our business financing pillar guide.
What lenders look at when you apply
Underwriting for a line of credit is a judgment about repayment behavior over time, not a single purchase. Expect a lender to weigh:
- Cash-flow consistency: Business bank statements are the core exhibit. Underwriters look at average daily balances, deposit frequency, and how often the account runs negative.
- Time in business: Many bank lines want two-plus years; online lenders may go to six to twelve months.
- Revenue: Consistent monthly revenue signals you can service a revolving balance without stress.
- Credit profile: Bank and prime online lines typically look for solid personal and business credit. Lower scores narrow the field but don't necessarily end it.
- Existing debt load: Stacked obligations and heavy daily or weekly debits already hitting the account will weigh against a new line.
Two documents do most of the talking: recent business bank statements and a clean, current view of your revenue. Having them ready is the difference between a fast yes and a stalled file.
What a business line of credit costs
Cost on a line comes from a few moving parts, and because you pay interest only on what you draw, the effective cost depends heavily on how you use it. Common components:
- Interest rate on drawn balances: Usually variable, priced off your credit and cash flow. You carry cost only while a balance is outstanding.
- Draw fees: Some lenders charge a small percentage each time you pull funds.
- Maintenance or annual fee: A flat charge to keep the line open, whether or not you draw.
- Renewal terms: Lines are reviewed periodically; a lender can adjust your limit or rate at renewal based on updated performance.
The practical read: an undrawn line is cheap insurance, and a line you draw briefly and repay fast is efficient. A line you keep near its limit month after month behaves like expensive long-term debt and signals to the next lender that cash flow is strained. Match the tool to the timing of the need and the cost stays proportional to the benefit.
Decision framework: when a line of credit fits and when it doesn't
A line is a specialist tool. Here is the underwriter's rule of thumb.
A line of credit works best when:
- Your gaps are about timing, such as a customer paying net-60 while payroll runs biweekly.
- You need repeated, unpredictable access rather than one lump sum.
- You can draw for a short cycle and pay it back down, keeping the balance moving.
- You have the credit and cash-flow profile to clear underwriting, or the patience to build it.
- You want standby capacity in place before an emergency, not during one.
Avoid a line (or choose another structure) when:
- You have one defined, large purchase, that is a term loan.
- You would use the line to cover a permanent, structural shortfall, that is not a timing problem and a line will only mask it.
- You need money in the next day or two and can't wait out bank-line underwriting.
- Your credit or time in business puts a bank line out of reach right now.
- You'd be tempted to run it near the limit indefinitely, turning revolving flexibility into hard-to-shake debt.
If the last two describe you, revenue-based funding is often the more honest fit, it underwrites on deposits and revenue rather than credit, and it moves in a timeframe a bank line can't.
Example scenario: using a line to cover a receivable gap
The table below is an illustration only, using round numbers to show the mechanic, not a quote. Figures are labeled for example.
| Step | Action | Effect on the line (for example) |
|---|---|---|
| 1 | Line approved | $50,000 limit open, $0 drawn |
| 2 | Payroll due before a net-60 invoice clears | Draw $12,000; balance $12,000, room left $38,000 |
| 3 | Second invoice period, inventory reorder | Draw $6,000; balance $18,000, room left $32,000 |
| 4 | Large receivable lands | Repay $18,000; balance $0, full $50,000 available again |
The takeaway: the owner carried interest only during the weeks a balance was outstanding, and the full limit reset the moment the receivable arrived. That is the line working as designed, bridging timing, not funding a permanent shortfall. Notice there is no attempt to compute a fixed total payback here, because on a revolving line the cost tracks how long each draw stays out, not a single multiplier.
When the bank says no: the revenue-based alternative
Traditional and online lines lean hard on credit scores and multi-year history. Plenty of healthy businesses, especially newer ones, seasonal operators, or owners rebuilding credit, get declined despite strong deposits. That is the gap a revenue-based / MCA marketplace fills.
Instead of leading with your credit score, a revenue-based funder underwrites on your bank deposits and revenue. Typical parameters look like this:
- Approval basis: Bank statements and revenue consistency over credit score.
- Credit bar: FICO 500+ is commonly workable.
- Funding size: Often starting around $10,000 and scaling with monthly revenue.
- Speed: Frequently 24 to 48 hours from approval to funds.
- Repayment: Structured around your revenue and cash-flow rhythm.
This is not a line of credit, it is a lump-sum, revenue-based product, so use it for a defined need you can turn into revenue quickly, not as an open-ended standby. No responsible funder can promise approval; anyone claiming a guaranteed yes before reviewing your statements is a red flag. A marketplace matches your profile to funders whose criteria you actually fit, which raises your odds without the multi-week bank timeline. Start with our financing options guide to see where it sits among the alternatives.
Frequently asked questions
What is the difference between a line of credit and a business loan?
A term loan delivers one lump sum you repay on a fixed schedule, best for a single planned purchase. A line of credit is revolving, you draw what you need when you need it, repay, and draw again, and you pay interest only on the outstanding balance. Choose a line when the need is recurring or timing-driven and a loan when it is one defined expense.
What credit score do I need for a business line of credit?
Bank and prime online lines typically look for solid personal and business credit, often around 650 or higher, plus two-plus years in business. If your score or history falls short, a revenue-based alternative that underwrites on bank deposits and revenue commonly works with a FICO of 500 or above.
Do I pay interest on the full credit limit?
No. You pay interest only on the amount you have actually drawn. If you have a $50,000 limit (for example) but only $8,000 outstanding, you carry cost on the $8,000. An undrawn line generally costs nothing beyond any maintenance or annual fee.
How fast can I get a business line of credit?
Opening a bank or prime online line can take days to a few weeks because of the underwriting involved. If you need cash within a day or two and can't wait, a revenue-based product often funds in 24 to 48 hours, though it is a lump sum rather than a revolving line.
When should I avoid using a line of credit?
Avoid a line when you have one large, defined purchase (use a term loan), when you'd use it to cover a permanent structural shortfall rather than a timing gap, or when you'd end up carrying a maxed balance indefinitely. In those cases a line either doesn't fit or quietly turns into expensive long-term debt.
Can I get funding if I've been declined for a bank line of credit?
Often yes. Many healthy businesses are declined by banks on credit or time-in-business rules despite strong deposits. A revenue-based / MCA marketplace underwrites primarily on your bank statements and revenue, works with FICO 500+, typically starts around $10,000, and matches you to funders whose criteria you fit. No funder can guarantee approval before reviewing your statements.
How much can a business line of credit give me?
Limits vary widely with your revenue, credit, and whether the line is secured. Secured lines backed by receivables or equipment tend to run larger; unsecured lines are usually smaller but faster to open. Revenue-based alternatives commonly start around $10,000 and scale with monthly revenue.
Is a business line of credit reusable?
Yes, that is its defining feature. As you repay principal, that capacity becomes available to draw again without a new application, for as long as the line stays open and in good standing. This reusability is what makes a line efficient for recurring, unpredictable needs.
