Business line of credit: flexible money, if you use it well

A business line of credit gives you access to a set amount of money that you can draw from, repay and draw from again. You pay interest only on what you actually use. For uneven cash flow it is often the most efficient tool there is, and the habits you bring to it decide whether it stays that way.

Typical limit: $10,000 to $250,000 online; banks can go higher
Typical cost: Varies widely; banks are usually cheapest, online lines cost more
You pay interest on: The amount drawn, not the full limit
Other fees: Possible draw, annual or maintenance and inactivity fees
Repayment: Monthly at most banks; weekly or monthly per draw online
Best for: Recurring, short timing gaps between paying out and getting paid

How a revolving line works

When you are approved, the lender sets a credit limit. You can draw any amount up to that limit, whenever you need it. As you repay, the available amount goes back up, so you can borrow again without a new application. That cycle is what "revolving" means.

Most lines have a draw period, the window during which you can take money out. At a bank this is often a year and is commonly renewed after a review. Some lines then move into a repayment period, when you can no longer draw and must pay down what you owe. Others simply come up for renewal, and the lender can raise, lower or close the line at that point.

How each draw gets repaid varies by lender:

Bank-style lines often require monthly payments of at least the interest due, sometimes with a small share of principal, and expect the balance to be paid down regularly.
Many online lines treat each draw almost like a small loan, repaid in fixed weekly or monthly installments over several months. A new draw starts its own repayment schedule.

What it costs: interest on what you draw

The main advantage is simple. Unused credit costs no interest. If you have a $100,000 line and use $30,000, interest accrues on $30,000.

Say you draw $30,000 at 20% APR to cover a slow quarter. If you pay only interest for three months, that is $500 a month, or $1,500, before repaying the $30,000. If instead you repay $10,000 at the end of each month, the interest drops to about $500, then $333, then $167, roughly $1,000 in total. Paying down quickly is how a line stays cheap.

Fees can change the picture, especially on small or brief draws:

Draw fees. A percentage charged each time you take money out. A 1.5% draw fee on that $30,000 is $450, which adds noticeably to a three-month cost of $1,000 to $1,500.
Annual or maintenance fees. A flat charge to keep the line open, whether you use it or not.
Inactivity fees. Some lenders charge if you don't draw for a while.
Origination fees. Less common on lines than on loans, but they exist.

Ask whether the rate is fixed or variable. Many bank lines are tied to a benchmark such as the prime rate, so your cost can rise or fall over time.

Line of credit vs other options

	Line of credit	Working capital loan	Merchant cash advance
How you get the money	Draw what you need, when you need it	One lump sum	One lump sum
What you pay for	Interest on the drawn balance, plus any fees	Interest or a flat fee on the full amount	A fixed factor fee on the full amount
Reuse	Yes, as you repay	No, a new loan is needed	No, a new advance is needed
Typical use	Recurring gaps and surprises	A defined one-time project	A fast, short-term need
Relative cost	Often lowest if paid down quickly	Moderate	Usually highest

For a one-time purchase you plan to repay over a year or more, a working capital loan may cost less than carrying a balance on a line. For a machine or vehicle, equipment financing usually does. If you are weighing a line against a merchant cash advance, convert the advance to an APR with our true-cost calculator first.

Secured vs unsecured, bank vs online

A secured line is backed by specific collateral, such as receivables, inventory, real estate or a cash deposit. Collateral typically gets you a larger limit and a lower rate, but the lender can claim the asset if you default. An unsecured line has no specific collateral. It usually comes with a smaller limit, a higher rate, a personal guarantee and often a general UCC lien on business assets, so "unsecured" does not mean "no strings".

Banks and credit unions generally offer the lowest rates but want more history, stronger credit, financial statements and sometimes an existing relationship. Approval can take weeks. Online lenders typically decide faster, with lighter paperwork and more weight on recent bank activity, and they charge more for it. Neither is better in every case. The right one depends on how soon you need the line and how much you will use it.

How to use a line well

Open it before you need it. Lenders prefer to lend when your numbers look healthy. Applying in a crunch usually means a smaller line at a higher price.
Match draws to a repayment source. Draw to cover payroll while waiting on a customer payment, then repay when it arrives. That is the textbook use.
Don't fund long-term assets with it. Buying equipment or covering a renovation ties up the line for years at a rate meant for short-term money.
Watch the balance that never drops. If your balance has sat near the limit for months, the line has quietly become a long-term loan, often an expensive one.
Keep some room. A line maxed out has no capacity left for the emergency it was meant for.

When a line of credit fits, and when it doesn't

It is often a good fit when:

your income is seasonal or customers pay on 30 to 90 day terms;
you want a standing cushion for repairs or surprises;
you can repay each draw within weeks or months.

It is usually a poor fit for covering steady losses, for large one-time purchases you will repay over years, or when your cash is mostly tied up in unpaid invoices, where invoice factoring may address the cause directly. For long-term growth projects, an SBA loan can be worth the extra paperwork.

Contract terms to check

Rate type. Fixed or variable, and if variable, what benchmark it follows and how often it resets.
Every fee. Draw, annual, maintenance, inactivity, origination and late fees.
Repayment of each draw. Interest-only, a minimum payment, or a fixed schedule per draw.
Draw period and renewal. How long you can draw, and what happens at renewal.
The lender's right to reduce or freeze the line. Many agreements allow it if your finances change.
Collateral, liens and guarantees. What is pledged, and who is personally on the hook.
Covenants. Bank lines may require minimum balances or financial ratios, or an annual "clean-up" period at a zero balance.

Common questions

Do I pay interest on the whole credit limit?

No. Interest accrues only on the amount you have drawn. You may still owe fees on an unused line, such as an annual or maintenance fee, so ask what applies.

What happens when the draw period ends?

It depends on the agreement. Many lines are reviewed and renewed. Others move into a repayment period where you can no longer draw and must pay down the balance on a schedule.

Can a lender cut my credit limit?

Often, yes. Many line agreements let the lender reduce, freeze or close the line if your business finances or credit change. Read that section carefully, and do not plan around credit you may not be able to draw.

Is a line of credit better than a loan?

For recurring or unpredictable needs, a line is usually more efficient because you only pay for what you use. For a single, defined purchase repaid over a longer period, a term loan can be cheaper and simpler.

Do lenders check credit for a business line of credit?

Yes, in nearly all cases. Some lenders pre-qualify with a soft inquiry, but approval usually involves a hard credit check. Many lines also require a personal guarantee.