Key takeaways
- A business line of credit is revolving: you draw, repay, and reuse the limit as needed.
- Interest typically applies only to the outstanding balance, not the full approved limit.
- Repaid principal replenishes the available limit for future draws.
- It suits short-term and working-capital needs rather than large one-time purchases.
- Common benchmarks for small-business financing include a $10,000 minimum and roughly FICO 500+, and approval is never guaranteed.
How it works
A lender approves the business for a maximum credit limit based on factors such as time in business, revenue, and credit profile. The owner can then draw funds up to that limit whenever needed, often through an online portal or a linked account.
- Draw: Pull any amount up to the approved limit.
- Repay: Pay back what was drawn, usually on a weekly or monthly schedule.
- Reuse: Repaid principal replenishes the available limit.
Interest generally applies only to the balance that is actually outstanding, not the full limit. Some lines are unsecured, while larger ones may require collateral or a personal guarantee. Common qualification benchmarks for small-business financing include a minimum funding amount around $10,000 and a personal credit score of roughly FICO 500 or higher, though requirements vary by lender and product. No lender can promise approval, and no line of credit is ever guaranteed.
A quick example with round numbers
Suppose a business is approved for a $50,000 line of credit.
| Action | Amount | Available limit remaining |
|---|---|---|
| Starting limit | $50,000 | $50,000 |
| Draw for inventory | $20,000 | $30,000 |
| Repay part of the balance | $10,000 | $40,000 |
| Draw for a repair | $5,000 | $35,000 |
In this example the owner never borrowed the full $50,000 at once. Interest would accrue on the outstanding balance (the amounts drawn and not yet repaid), and each repayment frees up room to borrow again later. The numbers here are illustrative only.
Why it matters to a business owner
Cash flow rarely arrives on a tidy schedule. A line of credit gives an owner a way to bridge the gaps between money going out and money coming in without applying for a brand-new loan each time.
- Flexibility: Borrow only what is needed, which can keep interest costs lower than a lump-sum loan sitting partly unused.
- Speed: Once the line is open, drawing funds is usually fast, which helps with time-sensitive needs like restocking or covering payroll.
- Reusability: The limit refreshes as balances are repaid, so the same facility can support the business through many cycles.
It is a tool for short-term and working-capital needs rather than for large, one-time purchases with a long payback, where a term loan may fit better.
Related terms
Understanding a line of credit is easier alongside a few neighboring concepts:
- Term loan: A lump sum repaid over a fixed period, in contrast to a revolving limit.
- Revolving credit: The broader category of borrowing that replenishes as it is repaid; a line of credit is one form.
- Working capital: The everyday funds a business uses to cover operations, often what a line of credit supports.
- Merchant cash advance (MCA): A different product based on future receivables; MCA relief refers to lowering the daily or weekly payment amount, not eliminating the obligation.
- Draw period: The window during which the business can borrow against the line.
Frequently asked questions
How is a business line of credit different from a term loan?
A term loan gives you a single lump sum that you repay over a set schedule. A line of credit lets you draw funds up to a limit, repay, and reuse the limit again, and you typically pay interest only on the outstanding balance rather than the full amount.
Do I pay interest on the entire limit?
Usually no. Interest generally applies only to the amount you have actually drawn and not yet repaid. The unused portion of the limit typically sits available without accruing interest, though specific terms vary by lender.
What do lenders look at to qualify a business?
Common factors include time in business, revenue, and credit history. Many small-business products look for a minimum funding amount around $10,000 and a personal credit score near FICO 500 or higher, but criteria differ by lender. Approval is never guaranteed.
Is a line of credit secured or unsecured?
It can be either. Smaller lines are often unsecured, while larger ones may require collateral or a personal guarantee. The structure affects the limit, cost, and qualification requirements.
How does this relate to a merchant cash advance?
They are different products. A merchant cash advance is based on future receivables, while a line of credit is revolving credit you draw and repay. If you already have an advance, MCA relief means lowering the daily or weekly payment amount, not paying off or erasing the balance.
