Business line of credit
Also called: line of credit
A business line of credit is a revolving credit limit you can draw from as needed and only pay interest on what you use.
A business line of credit works much like a credit card for your company. The lender approves a maximum limit, and you draw funds whenever you need them, up to that cap. You pay interest only on the outstanding balance, not the full limit, and as you pay down what you owe, that credit becomes available again. This revolving structure is the main difference from a term loan, which hands you one lump sum. Lines can be unsecured or secured by assets such as accounts receivable or inventory, and most require a personal guarantee.
A line of credit fits recurring or unpredictable needs: covering payroll during a slow month, buying inventory ahead of a busy season, or bridging the gap while you wait on customer payments. Because you only pay for what you use, it is well suited to cash flow swings rather than a single large purchase. Lenders price the line based on your revenue, time in business, and credit, and many charge a draw fee or an annual maintenance fee. Watch the rate, which is often variable, and confirm whether the line is revolving or expires after a set draw period.
Common questions
How is a line of credit different from a term loan?
A term loan gives you one lump sum repaid on a fixed schedule. A line of credit lets you draw repeatedly up to a limit and charges interest only on the balance you carry.
Do I pay interest if I do not use the line?
Generally no interest accrues on an untouched line, though some lenders charge an annual or maintenance fee to keep it open.
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