How does a business line of credit work?

A business line of credit is a revolving credit facility that gives you access to a pre-approved amount of capital that you can draw from as needed. You only pay interest on the amount you borrow, not the full credit limit. When you repay the borrowed amount, the credit becomes available again. It works like a credit card but with lower interest rates and higher limits.

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Business Line of Credit: How It Works

A business line of credit is a revolving credit facility that gives you access to a pre-approved amount of capital you can draw from as needed, paying interest only on the amount you actually borrow. When you repay the drawn amount, the credit becomes available again, making it the most flexible form of business financing for managing cash flow gaps, covering seasonal inventory purchases, and handling unexpected expenses without applying for a new loan each time.

How a Business Line of Credit Works

Think of a business line of credit as a pool of available funds with a maximum limit. Your lender approves you for a credit limit, say $100,000. You can draw $20,000 today to pay a supplier, another $15,000 next week for a marketing campaign, and leave the remaining $65,000 untouched. You pay interest only on the $35,000 you have drawn, not the full $100,000 limit. As you repay the $35,000, that credit becomes available to draw again.

Lines of credit come in two structures. A revolving line of credit lets you draw and repay repeatedly throughout the draw period, which typically lasts 1 to 5 years and can often be renewed. This is the most common type and the most useful for ongoing cash flow management. A non-revolving line of credit works the same way initially, but once you repay drawn funds, you cannot borrow them again. The credit limit decreases with each draw. Non-revolving lines are less common and function more like a term loan with flexible disbursement.

Draw periods define how long you can access the credit line. During the draw period (typically 12 to 60 months), you can pull funds as needed. Some lines have a separate repayment period after the draw period ends, during which you can no longer draw new funds but must repay the outstanding balance. Others require full repayment within the draw period itself, with each draw having its own repayment schedule (for example, each draw must be repaid within 6 or 12 months).

What a Business Line of Credit Costs

Interest rates on business lines of credit vary dramatically by lender type and your qualification profile. Banks and credit unions offer the lowest rates, typically 7% to 15% APR for well-qualified borrowers. SBA Express lines of credit (backed by the SBA guarantee) range from prime + 2.75% to prime + 4.75%, which translates to roughly 10% to 12% APR in the current rate environment. Online lenders charge 10% to 80% APR depending on your risk profile, with most falling in the 15% to 35% range.

Beyond interest, watch for these additional fees. Draw fees of $5 to $50 per withdrawal are charged each time you pull funds. If you draw frequently in small amounts, these fees add up. Maintenance fees of $10 to $25 per month are charged whether or not you have an outstanding balance, essentially a cost for keeping the credit line available. Origination fees of 0% to 2% of the credit limit are charged when the line is first established. Inactivity fees are charged by some lenders if you do not draw funds for an extended period.

When comparing lines of credit, calculate the total cost for your expected usage pattern. If you plan to draw $30,000 for 3 months twice per year, calculate the interest cost plus all applicable fees for that specific scenario across each lender. A line with a lower interest rate but higher fees may cost more than a slightly higher-rate line with no fees, depending on how you use it.

Business Line of Credit vs Term Loan

A term loan gives you a lump sum with fixed monthly payments over a set period. A line of credit gives you flexible access to funds with variable payments based on what you have borrowed. The choice depends on how you need to use the capital.

Choose a term loan when you need a specific amount for a specific purpose with a clear timeline. Purchasing $80,000 in equipment, funding a $50,000 renovation, or acquiring another business for $200,000 are term loan scenarios. You know exactly how much you need, you need it all at once, and you can calculate the return on the specific investment.

Choose a line of credit when your capital needs are variable, recurring, or unpredictable. Covering the gap between paying suppliers and receiving customer payments (30 to 60 days of float), managing inventory purchases that vary by season, funding marketing spend that fluctuates month to month, or maintaining an emergency fund for unexpected opportunities or expenses are all line of credit scenarios.

Many established businesses maintain both: a term loan for major investments and a line of credit for working capital flexibility. The term loan handles the planned, predictable needs while the line of credit handles everything else.

Best Business Line of Credit Providers

BlueVine offers lines up to $250,000 with rates starting at 6.2% for a 6-month draw period. Minimum requirements are $40,000 in monthly revenue, 24 months in business, and a 625 credit score. BlueVine stands out for its integrated business checking account, which provides a seamless experience for businesses that use BlueVine for both banking and credit.

Fundbox provides lines from $1,000 to $150,000 with 12 or 24-week repayment terms on each draw. Rates start at 4.66% for the 12-week term. They have some of the lowest entry requirements: $100,000 in annual revenue, 6 months in business, and a 600 credit score. Fundbox is particularly good for very small businesses and freelancers who need small, frequent draws.

American Express Business Line of Credit (formerly Kabbage) offers $2,000 to $250,000 with monthly fees of 1.5% to 9% on the outstanding balance. They require $3,000 in monthly revenue with no published minimum credit score. The application integrates with QuickBooks, your bank account, and ecommerce platforms for a streamlined underwriting process.

Wells Fargo BusinessLine provides revolving lines from $5,000 to $150,000 for established businesses. Rates are prime + a margin based on your credit profile, typically resulting in 9% to 14% APR. Wells Fargo requires an existing business checking account with them and generally wants 2+ years in business with strong financials. The rates are lower than online lenders, but the qualification bar is higher.

SBA Express Line of Credit is available through SBA-approved lenders with credit limits up to $500,000 and a 7-year revolving term. The SBA guarantee reduces the lender's risk, which translates to lower rates (prime + 2.75% to prime + 4.75%) than comparable unguaranteed products. The application is faster than a standard SBA loan but still takes 1 to 3 weeks for approval, longer than online lenders.

How to Qualify for a Business Line of Credit

Qualification requirements vary by lender type. Online lenders are the most accessible: 6 to 12 months in business, $100,000+ annual revenue, 600+ credit score. Banks require more: 2+ years in business, $250,000+ annual revenue, 680+ credit score, and often an existing banking relationship. SBA Express lines fall between the two, requiring 2+ years and strong credit but offering more flexible revenue thresholds.

The factor that most influences your credit limit (not just approval) is your average daily bank balance and monthly revenue. Lenders typically offer lines equal to 10% to 30% of your annual revenue. A business doing $500,000 per year might qualify for a $50,000 to $150,000 line. You can increase your credit limit over time by maintaining the line in good standing, growing your revenue, and requesting periodic reviews.

Before applying, check your business and personal credit reports for errors, ensure your business bank account shows consistent deposits and a positive average balance, and have your last two years of tax returns available. If you use accounting software (QuickBooks, Xero, FreshBooks), many online lenders can connect to it directly, which speeds up the underwriting process and may improve your terms by giving the lender more data to work with.

When a Line of Credit Saves Your Business

The most valuable use of a business line of credit is having it in place before you need it. Applying for financing when you are already in a cash crunch puts you in a weak negotiating position and forces you to accept whatever terms are available on a short timeline. Setting up a line of credit when your business is healthy, generating consistent revenue, and showing positive cash flow gets you the best rates and highest limits.

Common scenarios where a line of credit provides critical flexibility: a large wholesale order arrives that requires you to purchase $40,000 in inventory immediately, but your cash reserves are $15,000. A key piece of equipment breaks and the replacement costs $8,000 that was not in this month's budget. Your biggest advertising channel suddenly produces results and you want to scale spend from $5,000 to $20,000 per month before competitors catch on. A supplier offers a 15% discount on your next order if you pay within 10 days instead of 30. In each case, a pre-established line of credit lets you act immediately rather than scrambling for financing under pressure.