Business Line of Credit: The Complete Guide

A business line of credit is the most flexible financing tool available to small businesses. Unlike a term loan where you borrow a fixed amount and repay on a schedule, a line of credit lets you draw funds as needed, repay, and draw again — only paying interest on what you actually use.

How a Business Line of Credit Works

A business line of credit operates like a revolving door of capital. Your lender establishes a credit limit — say $100,000. You can draw any amount up to that limit at any time, use the funds, repay them, and draw again. Interest accrues only on the outstanding balance, not the full credit limit.

Lines of credit are typically structured with a draw period (when you can borrow) and a repayment period (when you must repay what you've drawn). Some lines are evergreen — they renew annually as long as you remain in good standing. Others have a set maturity date after which the balance must be repaid in full. Understanding which structure you're getting is critical.

Secured vs. Unsecured Lines of Credit

A secured business line of credit is backed by collateral — typically accounts receivable, inventory, real estate, or a combination. Because the lender has a claim on specific assets, secured lines typically offer higher credit limits and lower rates. An unsecured line requires no specific collateral but almost always comes with a personal guarantee and blanket UCC lien.

For most small businesses seeking lines under $250,000, unsecured lines are the most practical option. Above $250,000, lenders increasingly require collateral — and the type of collateral you have determines how large a line you can secure.

What You Need to Qualify

Requirements for a business line of credit are generally more stringent than for a simple term loan because a line of credit represents an ongoing commitment from the lender. Typically: 1+ years in business (some lenders require 2+), minimum monthly revenue of $15,000–$25,000, personal credit score of 600+, and no recent bankruptcies.

Bank-issued lines of credit require stronger profiles: 2+ years in business, strong profitability on tax returns, and often collateral. Online alternative lenders offer lines of credit with more flexible standards — some approve businesses as young as 6 months with revenue of $10,000/month — but at higher rates.

Using a Line of Credit Strategically

The most effective use of a business line of credit is for cyclical or unpredictable cash flow gaps — seasonal businesses that need capital to stock up before peak season, service businesses waiting on invoice payments, or companies covering payroll during a slow month.

A common mistake is using a line of credit to fund permanent capital needs — buying equipment, funding a long-term hire, or financing a renovation. These are better served by a term loan with matching repayment period. Using revolving credit for long-term investments risks leaving yourself without available credit when you actually need it for cash flow.