A business line of credit is one of the most versatile financial tools a business owner can have — but it’s often misunderstood, misused, or obtained from the wrong lender at the wrong cost. This guide covers everything you need to know to use a line of credit strategically.
How a Business Line of Credit Works
Unlike a term loan, a line of credit is revolving. You’re approved for a credit limit — say, $100,000 — and you can draw any amount up to that limit at any time. You only pay interest on what you’ve actually borrowed. As you repay, that credit becomes available again.
Think of it like a credit card for your business, but typically with higher limits, lower rates, and more flexible draw mechanics. Compare business line of credit lenders, rates, and credit limits here.
There are two types:
Secured lines of credit require collateral (business assets, equipment, accounts receivable). These offer higher limits and lower rates.
Unsecured lines of credit require no specific collateral but often require a personal guarantee. Rates are higher, and limits are typically lower — usually under $100,000 for small businesses.
What Does It Cost?
A business line of credit involves several potential costs:
- Interest rate: Typically 8%–60% APR depending on lender and creditworthiness
- Draw fee: Some lenders charge 1%–3% each time you access funds
- Maintenance/annual fee: Common with bank LOCs — often $150–$500/year
- Non-usage fee: If you don’t draw from the line, some lenders charge a small inactivity fee
Online lenders tend to be more expensive but faster. Banks offer the lowest rates for qualified borrowers but take longer to approve. Use our free loan calculator to estimate your total interest cost at different draw amounts and repayment timelines before committing to a lender.
Best Uses for a Line of Credit
A line of credit is not for funding long-term capital investments — that’s what a term loan is for. It excels at:
- Bridging cash flow gaps between invoicing customers and receiving payment
- Covering seasonal inventory build-ups before your busy season
- Handling unexpected expenses — equipment repairs, sudden tax bills, emergency staffing
- Payroll backup if revenue timing is unpredictable
If your cash flow gap is driven specifically by slow-paying clients rather than general operations, invoice financing may be a more targeted solution — it advances up to 90% of outstanding invoice value within 24 to 48 hours with no credit score requirement.
Qualification Requirements
- Credit score: 600–640 minimum at most online lenders; 680+ for bank LOCs
- Time in business: 6 months minimum (online); 2 years (bank)
- Annual revenue: $50,000–$100,000 minimum
Read our full guide on how your credit score affects business loan approval to understand how improving your score from 600 to 640 can meaningfully lower your draw rate and increase your approved limit.
Mistakes to Avoid
The most common mistake business owners make with a line of credit is treating it as a long-term loan — drawing the full amount and not paying it back. This eliminates your revolving benefit and signals to lenders that you’re cash-strapped, potentially triggering a limit reduction or closure.
Use your line of credit for short-term needs, repay quickly, and you’ll have a reliable funding backstop ready every time you need it. For longer-term planned investments, a small business term loan is the more appropriate product — fixed monthly payments and lower rates over a defined repayment period.
Frequently Asked Questions
How does a business line of credit work?
A line of credit gives you a credit limit you can draw from, repay, and draw again. You pay interest only on what you use. Unlike a term loan, the credit restores as you repay — no reapplying each time you need funds.
What is the difference between a secured and unsecured business line of credit?
Secured lines require collateral and offer higher limits and lower rates. Unsecured lines require a personal guarantee instead — limits are lower, rates higher, but no specific assets are pledged.
What credit score do I need for a business line of credit?
Online lenders typically accept 600 to 625. Credibly and Fora Financial work with scores as low as 500. Banks require 680 or higher. Below 600, look for revenue-based lenders that prioritise cash flow over credit score.
How long does it take to get approved for a business line of credit?
Online lenders decide within hours and fund in one to two business days. Bluevine offers same-day draws into a linked checking account. Bank lines take one to four weeks.
Can I use a business line of credit for any business expense?
Generally yes — payroll, inventory, marketing, supplier payments. Lines of credit rarely restrict how funds are used, unlike SBA loans or equipment financing. Check your agreement for exceptions, though they are uncommon.
What happens if I do not use my business line of credit?
No interest if you have not drawn. Some lenders charge a small maintenance or inactivity fee on unused lines — check your agreement. An undrawn line still has value as a cash flow buffer.
Does a business line of credit expire?
Most lines have a draw period of 12 to 36 months, then require renewal or repayment. Many online lenders renew automatically for accounts in good standing. Ask about renewal terms before you open the account.
