How a Business Line of Credit Works

A line of credit works like a credit card for your business, but usually with a lower rate. You get a limit, draw what you need, repay it and draw again. You pay interest only on what you use.

Line of credit vs term loan

	Line of credit	Term loan
Money	Draw as needed, up to a limit	All at once
Interest	Only on the balance used	On the full amount
Best for	Short-term, repeating needs: inventory, payroll gaps, receivables	Long-term investments: equipment, buildings, acquisitions
Renewal	Often reviewed every year	Fixed schedule to payoff

Rule of thumb: use short-term money for short-term needs. Don’t buy a building with a line of credit, and don’t fund payroll with a 25-year loan.

Where to get one

• Banks and credit unions: usually for businesses with two or more years and solid financials.
• SBA Express: allows revolving lines up to $500,000. See SBA Express.
• SBA CAPLines: 7(a) lines for seasonal needs, contracts, builders and working capital.
• Online lenders: faster, usually more expensive. See online lender vs bank.

What lenders check

1. Time in business and revenue.
2. Receivables and inventory (lines are often secured by them).
3. Cash flow and existing debt.
4. Personal credit of the owners.

Costs to ask about

Interest rate (usually variable), annual or renewal fees, draw fees, and whether the line must be paid to zero for some period each year (“clean-up” requirement).

Using it well

Draw for a reason, repay as soon as cash comes in, and keep a buffer. A maxed-out line that never goes down is a warning sign to lenders.

Find lenders in our lender finder and check SBA Express lenders in your state.

Frequently asked questions

How is a line of credit different from a loan?

You draw only what you need and pay interest only on the balance used, then repay and draw again.

Can I get an SBA line of credit?

Yes. SBA Express allows revolving lines up to $500,000, and SBA CAPLines offer 7(a) lines for specific needs.

What is a clean-up requirement?

A condition that you pay the line down to zero for a period each year.