Draw period
The draw period is the window during which you can borrow from a line of credit, typically paying interest only on the amount you actually use.
A draw period applies to revolving financing such as a business line of credit. During this window you can pull funds as needed, up to your credit limit, repay them, and borrow again. You are usually charged interest only on the balance you have drawn, not on the full limit. If you have a $100,000 line but have only drawn $20,000, your interest accrues on the $20,000. When the draw period ends, many lines move into a repayment period where you can no longer draw and pay down what you owe on a set schedule.
The draw period is what makes a line of credit flexible for managing uneven cash flow, since you tap it only when you need it and stop paying once you repay. Watch the terms around it. Some lines charge a fee on the unused portion, and the rate during the draw period is often variable, tied to a benchmark like the prime rate. Know how long the draw period lasts and what happens when it closes, because the shift into repayment can change your monthly obligation. Compare the draw terms when weighing one line against another.
Common questions
Do I pay interest on my whole credit limit during the draw period?
No. On most lines of credit you pay interest only on the funds you have actually drawn. If you draw nothing, you generally owe no interest, though some lines carry a separate fee on the unused amount.
What happens when the draw period ends?
You typically can no longer borrow new funds and enter a repayment period, paying down the outstanding balance on a fixed schedule. Confirm the length of both phases before you sign.
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