What Is a Business Line of Credit?
A business line of credit (LOC) is a revolving credit facility that gives your business access to a pre-approved pool of funds. Think of it like a credit card, but for your business and with higher limits.
You draw money when you need it, up to your credit limit. You pay it back. Then you can draw again without reapplying. The key advantage: you only pay fees or interest on the amount you've actually drawn, not the full credit limit.
The core idea: A business line of credit is a revolving credit facility that provides ongoing access to a pre-approved pool of capital, typically ranging from $5,000 to $1.5 million. Unlike a term loan that disburses a lump sum, an LOC lets businesses draw funds as needed and replenish available credit as principal is repaid.
Credit lines typically range from $5,000 to $1.5 million. Terms run 6-36 months, and payments are usually weekly or monthly. Once your line is established, drawing additional funds is fast - often same-day or next-day.
If you've ever wished you had a financial safety net for your business - money available when you need it, without the cost when you don't - that's exactly what a business line of credit is.
How a Business Line of Credit Works
The process is simpler than most business financing. Here's the lifecycle.
Step 1: Get Approved for a Credit Limit
You apply and the lender approves you for a credit limit based on your revenue, credit score, and business history. For example: a $100,000 line of credit.
Step 2: Draw Funds When You Need Them
You request a draw for the amount you need. Need $30,000 for inventory? Draw $30,000. The remaining $70,000 stays available for later.
Most lenders have minimum draw amounts (typically $1,000-$10,000). Draws are usually funded within 1-2 business days. Some lenders fund same-day.
Step 3: Make Payments on What You Drew
Payments are based on the amount you've drawn, not the full credit limit. If you drew $30,000 from a $100,000 line, your payments are calculated on that $30,000.
Payment frequency depends on the lender:
- Weekly - Most common for alternative lenders
- Bi-weekly - Available from some lenders
- Monthly - Available from SBA-backed and select lenders
Step 4: Replenish and Draw Again
As you pay down the principal, your available credit replenishes. Paid back $10,000 of that $30,000 draw? You now have $80,000 available again. No need to reapply.
A Real-World Scenario
Let's say you own a landscaping business. Revenue peaks in spring and summer but drops in winter. Here's how a line of credit works for you:
- January: Draw $25,000 to cover payroll and equipment maintenance during the slow season
- March-April: Revenue picks up. Pay back the $25,000 draw from seasonal income.
- May: Land a big commercial contract. Draw $40,000 to buy materials and hire temporary crew.
- July: Contract payments come in. Pay back the $40,000.
- October: No draws needed. Your line sits there, costing you nothing, until you need it again.
If you'd taken a $40,000 term loan in January instead, you'd be paying interest on the full $40,000 for the entire year - even during months you didn't need the money. The line of credit saved you months of unnecessary interest.
Pro Tip: Treat your line of credit like a tool, not a piggy bank. Draw for specific purposes that generate revenue or cover genuine short-term gaps. Pay it back as quickly as possible. The faster you repay, the less the draw costs you - and the more available credit you have for the next opportunity.
What a Business Line of Credit Costs
LOC pricing varies more than other lending products because different lenders use different fee structures. Here are the main cost components:
| Cost Component | Typical Range | How It Works |
|---|---|---|
| Draw Fee | 1.99-4% | Charged each time you draw funds. A 3% fee on a $50,000 draw = $1,500. |
| Origination Fee | 0-6% | One-time fee when the line is established. Not all lenders charge this. |
| Balance Fee / Interest | Below 1%/month | Accrues daily or weekly on outstanding balance. Only on drawn amount. |
| Establishment Fee | 0-2% | One-time setup fee, sometimes spread over several months. |
| Maintenance Fee | $0 (most lenders) | Ongoing fee to keep the line open. Most lenders don't charge this. |
Cost Example: $50,000 Draw from a $100,000 Line
Let's say you draw $50,000 with a 3% draw fee and a monthly balance rate of 0.75%. You repay over 6 months.
- Draw fee: $1,500 (3% of $50,000)
- Balance fees over 6 months: ~$1,400 (declining balance as you repay)
- Total cost: ~$2,900
- Effective APR: ~12-15%
Compare that to a merchant cash advance on the same $50,000: $10,000-$25,000 in fees (factor rate of 1.2-1.5). The line of credit costs a fraction.
Key Takeaway
The true cost of a line of credit depends on two things: how much you draw and how fast you repay. Unlike a term loan where you're locked into a fixed payment for years, a LOC rewards fast repayment. The quicker you pay back a draw, the less it costs.
Who Should (and Shouldn't) Get a Business Line of Credit
A Line of Credit Is Right If:
- Your cash flow is seasonal or variable - Restaurants, landscaping, retail, construction - any business where revenue swings month to month. Draw during slow periods, repay during peak.
- You need ongoing access to working capital - Covering payroll, inventory, supplies, or marketing expenses that come up regularly.
- You want a financial safety net - Having a line available (at zero cost when not drawn) gives you options when unexpected expenses or opportunities hit.
- You don't know exactly how much you'll need or when - A LOC's flexibility is perfect for unpredictable capital needs.
- You want to minimize borrowing costs - Only paying on what you draw, and only for as long as it's outstanding, is the most cost-efficient working capital structure.
A Line of Credit Is Probably Not Right If:
- You need a large, one-time lump sum - For a specific purchase like equipment, real estate, or an acquisition, a term loan or SBA loan gives you better rates and terms.
- Your credit score is below 575 - Most LOC programs require at least 575. If your credit is lower, a merchant cash advance (500+ credit) may be the only option.
- Your business is less than 1 month old - Most LOC lenders need at least some operating history, though one lender starts at just 1 month.
- You're looking for the absolute cheapest money - SBA loans have lower rates (10-13% APR), but they take 60-90 days and require more documentation.
- You have 700+ credit and want 0% financing - Credit stacking can get you $50K-$250K at 0% APR for 12-18 months. If your credit supports it, that's cheaper than any LOC.
Pro Tip: The best time to get a line of credit is before you need it. Apply when your business is healthy and revenue is strong. Lenders give better terms to businesses that aren't desperate for cash. Having a line already in place means you can act immediately when an opportunity (or emergency) shows up.
Line of Credit vs. Other Funding Options
Understanding how a LOC compares to other products helps you choose the right one for your situation.
| Criteria | Line of Credit | Term Loan | MCA | Credit Stacking |
|---|---|---|---|---|
| Structure | Revolving | Lump sum, fixed | Lump sum, fixed | Revolving (cards) |
| Access | Draw as needed | One-time | One-time | Draw as needed |
| Effective APR | 10-35% | 8-30% | 40-150%+ | 0% for 12-18 mo |
| Credit Score | 575+ | 600+ | 500+ | 700+ |
| Funding Speed | 1-5 days | 1-3 weeks | 24-72 hours | 2-3 weeks |
| Amounts | $5K-$1.5M | $10K-$5M | $5K-$500K | $50K-$250K |
| Payments | Weekly or monthly | Weekly or monthly | Daily or weekly | Monthly (min due) |
| Builds Credit | Yes | Yes | No | Yes |
| Best For | Flexible, ongoing needs | One-time purchases | Fast cash, low credit | Startups, 0% funding |
LOC vs Term Loan: If you know exactly how much you need and when, a term loan may be simpler and cheaper. If you need flexibility - drawing different amounts at different times - a LOC is the better structure. Many businesses use both: a term loan for a large one-time expense and a LOC for ongoing working capital.
How to Qualify for a Business Line of Credit
LOC requirements vary by lender, but here's what most programs look for.
Basic Requirements
- Credit score: 575-680+ depending on the program
- Time in business: 1 month to 3 years depending on the lender
- Monthly revenue: $10,000-$100,000+ depending on the program
- Daily bank balance: $1,500-$10,000 average
- Bank deposits: 3-8 per month (shows active business)
What Opens the Most Options
The sweet spot for maximum lender options:
- Credit score: 650+ (qualifies for most programs)
- Time in business: 2+ years
- Monthly revenue: $30,000+
- Clean banking history: No NSF (non-sufficient funds) issues, no negative balance days
What You'll Need to Apply
- Business application (basic info about your business)
- 3-6 months of bank statements
- Government-issued ID
- Some programs: tax returns (typically for lines over $150,000)
- Some programs: voided check or bank linking via Plaid
Key Takeaway
A business line of credit is the most flexible form of working capital financing. You get the safety and convenience of having funds available without the cost of borrowing money you don't need yet. For businesses with variable cash flow or recurring capital needs, it's the right tool.
- Credit 575+, 1+ month in business: you likely qualify for at least one LOC program
- Credit 650+, 2+ years, $30K+/month revenue: you qualify for most programs
- Credit 700+: consider credit stacking instead for 0% APR funding
Frequently Asked Questions
What is a business line of credit?
A business line of credit is a revolving credit facility that gives your business access to a pre-approved pool of funds. Draw money when you need it, pay it back, and draw again without reapplying. You only pay fees or interest on the amount drawn, not the full credit limit. Lines typically range from $5,000 to $1.5 million.
How much does a business line of credit cost?
Most lenders charge a draw fee (1.99-4% per draw) and/or balance fees on outstanding amounts. On a $50,000 draw with a 3% draw fee, the upfront cost is $1,500 plus ongoing balance fees. Total effective APR typically ranges from 10-35%, depending on the lender and how fast you repay. This is significantly cheaper than MCAs (40-150%+ APR).
What credit score do you need for a business line of credit?
Most programs require 575-680 minimum. A 575 score qualifies with some lenders for lines up to $1.5 million. Higher scores (650+) unlock more options and better terms. SBA-backed lines require 680+. If your score is below 575, a merchant cash advance (500+ credit) may be an option.
How is a line of credit different from a business loan?
A business loan gives you a one-time lump sum with fixed payments. A line of credit gives you ongoing, revolving access. With a loan, you pay interest on the full amount from day one. With a LOC, you only pay on what you've drawn. Lines are better for variable expenses. Loans are better for one-time large purchases.
Can a business line of credit help build credit?
Yes. Many LOC providers report payment history to business credit bureaus. On-time payments build your business credit profile, qualifying you for larger lines and better terms over time. This is an advantage over merchant cash advances, which don't report to credit bureaus.
How fast can you get a business line of credit?
Initial approval and funding typically take 1-5 business days. Some lenders fund same-day. After your line is established, subsequent draws are usually available within 1-2 business days. This is slower than MCAs (24-72 hours) but faster than SBA loans (60-90 days).
Do you need collateral for a business line of credit?
Most business lines of credit from alternative lenders are unsecured - no collateral needed. The lender may file a UCC lien as a formality. SBA-backed lines may require collateral for larger amounts. A personal guarantee from the business owner is standard across most programs.
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