What Is a Business Line of Credit? A Complete Guide for Business Owners

A line of credit is not a loan. That distinction sounds small, but it changes how you borrow, what you pay, and when it makes sense. According to Federal Reserve data, roughly 43% of small businesses applied for some form of credit in the past 12 months—and among those who were approved, the most common product wasn't a term loan. It was a line of credit. Understanding exactly what you're getting—and what you're not—is the foundation of every capital decision you'll make.

This guide covers the mechanics, the math, the types, and the qualifications behind business lines of credit in plain language. No jargon left unexplained. No fees buried in the fine print.

The Core Definition: What a LOC Actually Is

A business line of credit is a pre-approved borrowing facility with a maximum credit limit. The lender approves you for, say, $250,000. You don't receive that $250,000 upfront. Instead, you draw from it as needed—$40,000 today for payroll, $75,000 next month for inventory—and interest accrues only on the outstanding balance. When you repay, that capacity becomes available again.

That last sentence is the critical one: you repay, and the credit restores. This is what distinguishes a line of credit from every other financing product. The credit revolves. Draw, repay, draw again—indefinitely, as long as you stay within your limit and remain in good standing with the lender.

Think of it as a financial buffer that lives inside your business. It doesn't cost you anything when you don't use it (though some lenders charge a small unused-line fee). When you do use it, the cost is proportional to exactly what you drew and for exactly how long you held it.

Why This Structure Exists

Banks created revolving credit facilities specifically for the operational rhythm of businesses. Unlike individuals, companies experience lumpy, unpredictable cash flows. A contractor lands a $500,000 job but won't invoice for 90 days. A retailer must buy inventory in October to sell it in December. A staffing agency must fund payroll weekly while waiting 30–60 days for client payment. A fixed loan amount doesn't solve these problems elegantly. A revolving draw facility does.

How It Differs From a Business Loan

The structural differences between a line of credit and a term loan are fundamental. A term loan delivers a lump sum on day one, and you begin repaying it—principal plus interest—immediately on a fixed schedule. The loan balance only decreases. You cannot draw from it again once repaid.

A LOC, by contrast, delivers nothing on day one. You borrow only when you need to. Interest begins only when you draw. And every dollar you repay restores your available credit. See our full LOC vs. Business Loan comparison for a deeper analysis of when each product is the right tool.

The practical implications are significant:

• Cost discipline: A LOC forces you to borrow only what you need, when you need it. With a term loan, you're paying interest on the full balance from day one—even if you don't deploy all the capital immediately.
• Flexibility: A LOC adapts to variable capital needs. A term loan is sized for a single, defined purpose.
• Permanence: A term loan is consumed and retired. A LOC can remain open for years, renewing annually, available whenever you need it.

The Two Main Types: Revolving vs. Non-Revolving

Not every line of credit is a revolving facility. The distinction matters.

Revolving Line of Credit

The standard business LOC is revolving: repay the drawn balance, and your available credit resets. Most bank LOCs, online LOCs, and SBA CAPLines operate this way. The revolving credit structure is what gives the product its operational flexibility. You can use it, repay it, and use it again without reapplying.

Non-Revolving Line of Credit

A non-revolving line—sometimes called a "draw loan"—lets you draw from an approved facility, but repayments do not restore availability. Once you've drawn the full limit, the facility is exhausted. Construction loans and some equipment financing arrangements work this way. The borrower draws in stages as the project progresses, but the total available credit only decreases. For most operational working capital needs, a revolving structure is more useful.

Secured vs. Unsecured Lines

Both revolving and non-revolving LOCs can be structured as secured or unsecured. The choice has significant consequences for rate, limit, and risk.

Unsecured Lines of Credit

An unsecured LOC requires no collateral. The lender approves you based on creditworthiness alone—your personal and business credit scores, revenue history, time in business, and financial strength. Because the lender has no asset to seize in default, they price for that risk. Expect higher rates and lower limits on unsecured facilities. Typical range: $25,000–$250,000 for qualified businesses.

Secured Lines of Credit

A secured LOC is backed by business assets—accounts receivable, inventory, equipment, or a blanket UCC-1 filing against all business assets. Some lenders also require a personal guarantee, making the owner personally liable for the debt. Secured lines typically offer lower rates and higher limits in exchange for the lender's reduced risk. A secured asset-based LOC can reach $5 million or more for businesses with strong receivables.

Who Qualifies for a Business Line of Credit

Qualification standards vary significantly between banks, credit unions, and online lenders. That said, there are consistent patterns across the market.

Bank LOC Requirements (Traditional)

• Minimum 2 years in business (some require 3+)
• Annual revenue typically $250,000+
• Personal credit score 680+ (720+ preferred)
• Positive cash flow demonstrated over 12–24 months
• Strong business credit score (Paydex 80+)

Online Lender LOC Requirements

• Minimum 6–12 months in business
• Annual revenue often $100,000–$150,000+
• Personal credit score as low as 600–620
• Bank statements demonstrating consistent cash flow

For a detailed requirements breakdown, see our LOC Requirements guide. If you're building toward qualification, How to Qualify for a Business LOC walks through specific steps to improve your approval odds.

How Funds Are Accessed and Repaid

The mechanics of drawing and repaying vary by lender, but the standard structure works as follows:

Drawing Funds

Once approved, you access your LOC through an online portal, a linked bank account, or a checkbook (for older bank products). You request a draw—say, $30,000—and the funds transfer to your business checking account, usually within 1–3 business days. Some online lenders offer same-day transfers on established relationships.

Interest Calculation

Interest accrues daily on the outstanding drawn balance only. If your LOC limit is $200,000 but you've only drawn $50,000, you pay interest on $50,000. The daily rate is your annual APR divided by 365. At 12% APR on a $50,000 balance, your daily interest charge is approximately $16.44.

Repayment

Most LOCs require minimum monthly payments—often interest-only during an active draw period, or a small percentage of the outstanding balance. Repaying the full drawn amount immediately restores your credit limit and stops interest accrual. There are rarely prepayment penalties on LOCs, which means paying down your balance early is almost always advantageous. For more detail on how business lines of credit work, including fee anatomy, see our mechanics guide.

Common Uses: When a LOC Makes Sense

A business line of credit is not the right tool for every capital need. It excels in specific scenarios:

1. Bridging Accounts Receivable Gaps

If you invoice net-30 or net-60, you may have $200,000 in outstanding invoices but $0 in your operating account. A LOC bridges that gap—fund payroll, overhead, and operations today; repay when the invoices clear.

2. Seasonal Inventory Financing

Retailers, wholesalers, and manufacturers buying seasonal inventory need capital months before the revenue arrives. A LOC lets you stock up in September, sell in November and December, then repay in January. Matching the capital cycle to the revenue cycle is exactly what revolving credit is designed for.

3. Payroll Bridging

For businesses with irregular revenue—project-based firms, contractors, agencies—making payroll every two weeks is a constant constraint. A LOC keeps payroll funded even during slow revenue weeks.

4. Emergency Buffer

A LOC costs nothing to maintain if you don't draw from it (assuming no unused-line fee). This makes it an ideal emergency fund—available instantly if equipment fails, a client cancels, or an unexpected expense appears.

5. Capturing Vendor Discounts

Many suppliers offer 2/10 net-30 terms: pay within 10 days and take a 2% discount. On a $500,000 annual purchasing volume, that's $10,000 in savings. A LOC lets you consistently take those discounts, turning cheap credit into a pricing advantage.

For working capital-specific applications, see our guide on working capital lines of credit, which covers sizing, lender expectations, and seasonal cash flow management in depth.

LOC vs. Term Loan vs. Business Credit Card

Rate Reality: What You'll Actually Pay in 2026

The rate you pay on a business LOC depends on the lender type, your credit profile, and whether the line is secured. Here's how the market looks in 2026:

• Bank LOCs: 7–17% APR. Typically variable, priced at prime rate (currently 7.5%) plus a margin of 0.5–9.5 percentage points depending on creditworthiness.
• Credit Union LOCs: Often 6.5–14%, slightly below banks for members with strong credit profiles.
• Online Lenders (established brands): 15–25% APR. Higher than banks but faster to approve and more flexible on requirements.
• Fintech/Alternative Lenders: 25–35%+ APR. Often factor-rate-based rather than APR-based; read the fine print carefully.

The gap between a bank LOC at 10% and an online lender at 28% is not trivial. On a $100,000 balance carried for 12 months, the difference is $18,000 in interest. That's a meaningful reason to invest in strengthening your credit profile before applying.

Frequently Asked Questions

What is a business line of credit?

A business line of credit is a revolving credit facility with a set maximum limit. You draw only what you need, repay it, and the credit restores—unlike a term loan, which delivers a fixed lump sum upfront.

How much can I borrow with a business line of credit?

Business lines of credit typically range from $25,000 to $5 million. Bank LOCs at the upper range require 2+ years in business and strong financials. Online lenders often start at $10,000 with more flexible requirements.

What interest rate should I expect?

Bank LOCs generally run 7–17% APR in 2026. Online and alternative lenders typically charge 15–35%+. The rate usually floats with the prime rate plus a margin determined by your credit profile.

Do I need collateral for a business line of credit?

Unsecured LOCs require no collateral but typically demand stronger financials and carry higher rates. Secured LOCs require collateral—receivables, inventory, or a blanket lien—in exchange for lower rates and higher limits.

How is a business line of credit different from a business credit card?

A LOC typically offers lower APRs (7–17% vs. 18–26% for cards), higher limits ($500K–$5M vs. $50K–$100K for cards), and funds that transfer directly to your bank account. Cards offer convenience and rewards but are more expensive for large balances carried month-to-month.

What credit score do I need?

Most bank LOCs require a personal credit score of 680+. Online lenders may approve scores as low as 600–620. Your business credit score, revenue history, and time in business also factor heavily into approval decisions.

How long does approval take?

Bank LOCs can take 2–6 weeks due to underwriting requirements. Online lenders often approve and fund within 1–5 business days. Some fintech lenders offer same-day decisions on lines under $250,000.