Business Line of Credit Glossary

The process of paying down a debt through scheduled payments over time. Unlike a LOC (where you repay and redraw freely), an amortizing loan has a fixed payoff schedule. Some term loans attached to LOCs have amortizing components.

A yearly charge to keep a business line of credit open, regardless of whether you draw on it. Typical range: $0 (online lenders) to $500–$1,500+ (bank LOCs). Sometimes called a maintenance fee or facility fee.

The true annualized cost of borrowing, including interest rate plus all fees (origination, annual, draw). APR allows apples-to-apples comparison between lenders who quote costs differently. Always compare APR — not just the stated interest rate.

A LOC structure where the credit limit is tied to the value of your business assets — typically accounts receivable and inventory. As receivables grow, your available credit expands. As you collect, it contracts. ABL is common for manufacturers and distributors with $5M+ in revenue.

The amount you can currently draw from your line of credit. Equals your credit limit minus your current outstanding balance. In ABL facilities, availability also fluctuates with your borrowing base.

A security interest filed by a lender against all of a business's assets — equipment, receivables, inventory, intellectual property. Most LOCs include a UCC-1 blanket lien. It doesn't restrict your operations, but it means the lender has a first claim on assets if you default.

In asset-based lending, the formula that determines how much you can borrow at any given time. Typically: (advance rate × eligible receivables) + (advance rate × eligible inventory). Lenders audit the borrowing base periodically — often weekly or monthly via a borrowing base certificate.

A credit score specific to your business entity, separate from your personal credit score. Reported by Dun & Bradstreet (Paydex, 0–100), Experian Business (Intelliscore, 1–100), and Equifax Business. Built through vendor trade lines, business credit cards, and LOC repayment history.

The SBA's revolving line of credit program for working capital, available in four variants: Seasonal, Contract, Builders, and Working Capital. Limits up to $5M. Rates: prime + 2.75–4.75%. Requires 2+ years in business and profitability. The Working Capital CAPLine functions like a traditional revolving LOC.

The number of days between paying for inputs and collecting cash from customers. Formula: Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding. A longer CCC means a larger working capital gap that a LOC must bridge.

Assets pledged to a lender to secure a loan or LOC. If you default, the lender can seize and sell collateral to recover what's owed. For LOCs: business receivables, inventory, equipment, and real estate are common collateral. Under $500K, many online lenders accept personal guarantee alone with no specific collateral pledge.

A fee charged on the unused portion of a credit facility. Common on bank LOCs over $1M. Typically 0.25–0.5% per year on the undrawn balance. Incentivizes borrowers to actually use the LOC they've been approved for.

A financial or operational condition in a loan agreement that you must maintain for the LOC to remain in good standing. Common covenants: minimum DSCR (usually 1.25×), minimum current ratio (usually 1.2×), maximum debt-to-equity. Breaching a covenant is a technical default even if you're current on payments.

The maximum amount you can borrow on a line of credit at any time. Set at approval. Can be increased via a limit increase request (typically requires 12 months of good payment history). In ABL facilities, the effective limit fluctuates with the borrowing base.

A withdrawal from your line of credit. You "draw" funds when you need them and repay at your own pace (subject to minimum payment requirements). Drawing creates a balance; repaying restores availability. Also called an "advance."

A fee charged each time you make a withdrawal from your LOC. Common at online lenders (1–3% per draw), rare at banks. Can significantly increase the effective APR for borrowers who draw frequently.

The time window during which you can make withdrawals from a LOC. For revolving business LOCs, the draw period typically equals the full term (1–3 years for bank LOCs, ongoing for many online LOCs). When the draw period ends, you enter the repayment period and can no longer draw.

A measure of your business's ability to cover debt payments from operating cash flow. Formula: Net Operating Income ÷ Total Annual Debt Service. Lenders typically require a minimum DSCR of 1.25×, meaning your income is 125% of your debt payments. Below 1.0 means you can't cover your debts from operations.

In asset-based lending, the subset of accounts receivable that count toward the borrowing base. Lenders exclude invoices that are 90+ days old, owed by related parties, concentrated in one customer over 25%, or subject to disputes. Only eligible receivables are advanced against.

A pricing method used by merchant cash advance (MCA) and some revenue-based financing products. Instead of an interest rate, you pay a multiple of the advance amount. A factor rate of 1.3 means you repay $1.30 for every $1.00 borrowed. Unlike APR, factor rates don't decrease as you repay early. Effective APR equivalents are typically 50–150%+.

A formal credit arrangement between a lender and borrower defining the terms under which credit is available. "Facility" is the formal term for what most borrowers call their LOC or line. A "credit facility" can include multiple instruments — a revolving LOC plus a term loan, for example.

An interest rate that changes with a benchmark rate, typically the prime rate or SOFR. Most business LOCs have floating rates. When the Fed raises rates, your LOC rate rises; when rates fall, it drops. Expressed as prime + X% or SOFR + X%.

A fee charged when a LOC goes unused for a specified period (typically 3–12 months). Common at some online lenders. Incentivizes active use. Usually $0 at banks and credit unions. Check the fee schedule before signing any LOC agreement.

Selling accounts receivable to a third party (factor) at a discount in exchange for immediate cash. Not technically a line of credit, but a common alternative for businesses that don't yet qualify for LOCs. Factoring rates: 1–5% of invoice face value. No credit check — approval is based on your customers' creditworthiness.

A revolving credit facility with a maximum limit. You draw funds when needed, repay them, and the availability replenishes — unlike a term loan where you borrow once and repay in fixed installments. Business LOCs are used for working capital, inventory, payroll gaps, and other recurring cash flow needs.

The process of extending a business LOC for another term, usually annually. At renewal, the lender reviews your financials and may change the limit, rate, or terms. A strong repayment record typically leads to limit increases and rate reductions. Don't wait until your LOC expires — start the renewal process 60–90 days early.

The smallest payment required each billing cycle to keep your LOC in good standing. For business LOCs, minimum payments are typically interest-only on the outstanding balance. Principal can be repaid at any time without penalty (for most LOCs). Some online LOCs have weekly or daily automatic payment schedules.

A trade credit arrangement where payment is due 30 days after invoice. Vendors who offer net-30 and report to business credit bureaus (D&B, Experian Business) are the primary way to build business credit history for new companies. Net-60 and net-90 extend the payment window further.

A one-time upfront fee charged when a LOC is approved and opened. Typically 0.5–3% of the credit limit at online lenders; 0–1% at banks. Negotiable, especially if you have a strong credit profile or existing banking relationship. Paid at closing, not spread over the life of the LOC.

A legal agreement making you personally liable for a business debt if the business can't pay. Standard for LOCs until a business has 3+ years of profitable history and significant net worth. A personal guarantee means the lender can pursue your personal assets (home, savings, etc.) in a default scenario.

A fee charged if you pay off a LOC balance early or close the facility before the end of the term. Rare for revolving LOCs (which are designed to be paid off and redrawn), but common for certain online lenders and some structured credit facilities. Always ask about prepayment terms before signing.

The benchmark interest rate that banks charge their most creditworthy customers. Published daily; currently approximately 7.5% (April 2026). Most bank and credit union LOCs are priced as prime + X%. When the Federal Reserve raises the federal funds rate, prime typically rises by the same amount.

A credit arrangement where repaid amounts become available to borrow again. A business LOC is revolving credit: draw $50K, repay $50K, and your full limit is available again. Contrast with non-revolving credit (term loans, mortgages) where repaid principal isn't re-available.

A secured LOC is backed by specific collateral (receivables, inventory, equipment, real estate). An unsecured LOC is backed only by your creditworthiness and personal guarantee — no specific assets are pledged. Unsecured LOCs typically have lower limits and higher rates. Most LOCs under $250K can be "unsecured" by assets but still require a personal guarantee.

The benchmark rate that replaced LIBOR for floating-rate loans. Most new commercial LOCs are now priced at SOFR + a spread. SOFR changes daily based on overnight U.S. Treasury repo transactions. For practical purposes, it behaves similarly to the federal funds rate as a benchmark.

A lump-sum loan repaid over a fixed schedule with fixed principal + interest payments. Unlike a LOC, you borrow once and can't re-draw. Best for one-time capital needs (equipment, expansion). A LOC is better for recurring working capital needs. Many businesses use both simultaneously.

One of the primary LOC qualification criteria — how long your business has been operating. Banks typically require 2+ years. Online lenders may approve at 6 months. The clock starts when the business opened (or when a dedicated business bank account was opened). This is a hard wall that can't be bypassed with good credit or revenue alone.

A public notice filed by a lender with the state to establish a security interest in your business assets. UCC-1s are public records. Multiple UCC-1 filings can create "lien stacking" — where multiple lenders have claims on the same assets — which is a red flag for new lenders and can block additional financing.

The percentage of your credit limit currently drawn. Formula: Outstanding Balance ÷ Credit Limit. High utilization (above 70–80%) signals to lenders that you're credit-dependent and increases risk scores. Low utilization demonstrates good cash management. Ideal for credit profile: keep utilization below 30% when your LOC reports to credit bureaus.

The funds a business needs to cover day-to-day operating expenses — payroll, inventory, rent, utilities — between the time cash goes out and revenue comes in. Formula: Current Assets – Current Liabilities. A business LOC is the primary tool for managing working capital gaps.

The recurring pattern of cash going out (purchasing materials, paying employees) and cash coming in (collecting from customers). The length and predictability of this cycle determines how much LOC capacity a business needs and what draw pattern makes sense.