How a Business Line of Credit Works — And When to Use One

A business line of credit sits in your back pocket. You don't need it until you do — and when you do, it's already there.

It's one of the most misunderstood business financing products, partly because it's confused with a term loan. They work very differently.

How a Line of Credit Works

A business line of credit is a revolving credit facility with an approved credit limit. You draw from it when you need cash, repay it, and draw again — similar to a credit card but typically with lower rates and larger limits.

Example:

• You're approved for a $150,000 line of credit
• In March, you draw $60,000 to cover payroll during a slow period
• In April and May, you pay it back as receivables come in
• In June, your credit line is back at $150,000

You only pay interest on what you've drawn, not on the full credit limit.

Types of Business Lines of Credit

Revolving vs. Non-Revolving:

• Revolving: Repay and draw again (most common)
• Non-revolving: Once drawn and repaid, the credit is gone — not reborrowed

Secured vs. Unsecured:

• Secured lines: Backed by collateral (accounts receivable, inventory, blanket lien on assets). Larger limits, lower rates.
• Unsecured lines: No collateral required. Smaller limits ($50K and under is common), higher rates.

HELOC (Home Equity Line of Credit):

• Many small business owners use a HELOC on their personal residence for business purposes. Lower rates, but personal risk.

What Lines of Credit Typically Cost

Rates are typically variable (tied to Prime or SOFR). Watch for:

• Draw fees (0.5–2% on each draw)
• Maintenance fees (annual or monthly)
• Unused line fees (some lenders charge if you don't draw)

When a Line of Credit Makes Sense

Good uses:

• Bridging cash flow gaps — You invoice net-30 but have to pay vendors now
• Covering payroll during a slow season
• Inventory purchases ahead of a busy season
• Small unexpected expenses — Equipment repair, emergency costs
• Capturing opportunities — A deal that requires quick capital

Poor uses:

• Funding long-term assets (use a term loan for equipment or real estate)
• Covering ongoing operating losses — a sign of a deeper business problem
• "Evergreen borrowing" where you never pay the balance down

A line of credit should cycle: drawn down and paid off, not perpetually at the maximum.

How to Qualify

Most lenders want to see:

• 1+ years in business (2+ for bank LOCs)
• $100K+ annual revenue for most bank products
• 650+ personal credit score (680+ preferred)
• Positive cash flow — lenders want to see you can repay draws
• Business bank account with consistent deposits

The SBA CAPLine Program

SBA offers four types of lines of credit under the CAPLine program:

• Seasonal CAPLine: For businesses with seasonal inventory or labor needs
• Contract CAPLine: Funded by specific contracts
• Builders CAPLine: For construction and renovation contractors
• Working Capital CAPLine: General revolving LOC up to $5M

CAPLines go through SBA-approved lenders, with the same 75–85% SBA guarantee as 7(a) loans.

Building Toward a Larger Line

If your current credit limit is smaller than you need, here's how to grow it:

1. Draw from the line and repay on time, consistently
2. Increase revenue and demonstrate it with bank statements
3. Reduce other debt to improve DSCR
4. Request a credit limit increase after 12 months of clean history

Many businesses start with a $25K–$50K unsecured line and grow to $250K+ over several years.

A business line of credit isn't a loan — it's infrastructure. Building and maintaining it before you desperately need it is the move.