What is a business line of credit?

Reviewed by Turan Zeynal, Managing Partner, Outset Funding Partners · Last reviewed July 17, 2026

TL;DR

A business line of credit (LOC) is a revolving credit limit — like a credit card, but usually with lower rates and no rewards. You draw funds as needed, pay interest only on the amount drawn, and the limit refreshes as you repay. LOCs are the standard tool for smoothing cash flow, not for one-time large purchases (that's what a term loan is for).

Quick facts

Typical limit: $10,000 – $500,000
APR range: 8% – 30% typical
Speed to approve: 1 day (online) – 8 weeks (bank)
Minimum credit: 600+ (online) / 680+ (bank)
Time in business: 6+ months (online) / 2+ years (bank)
Draw method: ACH transfer to business account
Interest structure: Only on drawn balance
Collateral: Secured or unsecured

The 60-second answer

A business line of credit is a flexible funding product where the lender approves a maximum credit limit, and you draw from it whenever you need to. You only pay interest on what you've drawn — not on the unused portion — and as you repay principal, that credit becomes available again to draw a second time.

This makes a LOC very different from a term loan (a single lump sum, repaid on a fixed schedule) or an MCA (a lump sum repaid as a percentage of card sales). A LOC is the right tool when your cash need is uncertain, recurring, or short — payroll gaps, inventory restocks, unexpected repairs — but it's the wrong tool for a one-time large purchase where a term loan would be cheaper.

How it works, step by step

Approval and credit limit
The lender approves a maximum limit based on your revenue, credit, and time in business. You don't receive funds until you draw.
First draw
You request a draw through an online portal or call. Most online LOCs ACH the funds to your business account the same or next business day.
Repayment on drawn balance
You make monthly (or weekly, for some short-term LOCs) payments of principal and interest on the drawn amount only.
Credit refreshes as you repay
As you pay down principal, that portion of your limit becomes available to draw again — this is what makes it 'revolving.'
Renewal or closure
Most LOCs have a 1–2 year draw period. At renewal, the lender re-underwrites (updated bank statements, sometimes updated tax returns) and either extends, increases, or closes the line.

When a LOC is the right tool — and when it isn't

A line of credit shines in one very specific situation: your cash need is recurring, uncertain in timing, and short in duration. Payroll during a slow month, a surprise inventory buy at a discount, a bridge on a late-paying customer — a LOC lets you draw exactly what you need for exactly as long as you need it, then repay and reuse the limit. That flexibility is worth paying a slightly higher rate than a term loan for, because you never sit on capital you're paying interest on but haven't deployed.

The flip side: a LOC is the wrong tool for a large, one-time purchase with a predictable payback period. If you're buying a $150,000 piece of equipment that will pay itself off in three years, a term loan or equipment finance at 8–12% APR will beat drawing that same amount on a 15–22% LOC every time. Owners who use their LOC as a de facto term loan almost always overpay. A useful rule: if the balance would stay near the limit for more than 6 months, refinance it into a term loan and free the LOC back up for its intended job.

One underrated benefit — a LOC that stays open and gets used lightly builds your business credit profile faster than almost any other product, because it reports both a high credit limit and low utilization to the business bureaus.

Pros and cons

Pros

✓Pay interest only on what you've drawn
✓Reusable — the limit refreshes as you repay
✓Materially cheaper than an MCA (8–30% APR vs 40%+ effective on MCAs)
✓Fast enough for real cash-flow use (1–5 days online)
✓Builds business credit when reported to bureaus

Cons

×Tighter credit box than an MCA (usually 600+)
×Some LOCs charge a draw fee (1–3% per draw)
×Bank LOCs often have annual renewal fees
×Personal guarantee usually required
×Not the cheapest option for large, one-time purchases (use a term loan)

Who qualifies

•US-based business, 6+ months in operation (online) or 2+ years (bank)
•$100,000+ annual revenue for most online LOCs
•600+ personal FICO (680+ for bank LOCs)
•Positive average bank balance
•Active US business bank account
•No active bankruptcy

LOC vs alternatives

Option	When to use	Watch out for
Business LOC	Recurring, uncertain, or short-term cash needs	Not the cheapest for large one-time purchases
Term loan	One-time large purchase with predictable ROI	Fixed structure — no flexibility
Business credit card	Everyday expenses under ~$50K, want rewards	Higher APR (18–29%)
MCA	Need cash in 1–3 days, 500+ FICO	Materially more expensive

Frequently asked questions

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

Both are revolving, but a LOC gives you cash (via ACH to your bank account), while a credit card gives you charging power (via the card network). LOCs typically have lower APRs and higher limits; credit cards have rewards and no draw fees.

What's the difference between secured and unsecured LOCs?

A secured LOC requires collateral (accounts receivable, inventory, real estate, or a CD) and typically offers a lower rate and higher limit. An unsecured LOC has no collateral requirement but comes with tighter credit standards and lower limits.

Can I get a business LOC without a personal guarantee?

Rarely — only large, established businesses (typically $10M+ revenue with strong business credit) can qualify for unsecured LOCs without a personal guarantee. For small business, expect to sign one.

Do lines of credit have draw fees?

Some do. Bank LOCs usually don't. Online LOCs often charge 1–3% per draw. Always compare all-in cost (APR + draw fees) across offers, not just the headline rate.

Can I have multiple business lines of credit?

Yes, but each lender will see the others on your business credit report and may reduce your approved limit accordingly. Total business debt (including LOCs) affects your DSCR calculation.

How is interest calculated on a LOC?

Interest accrues daily on the outstanding drawn balance and is billed monthly. If you draw $10,000 for 15 days at 15% APR, you'd owe roughly $62 in interest for that period.

Sources

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