How does a business line of credit work?
A funder approves a maximum limit. You draw funds when a need comes up, repay on a set schedule, and can draw again as the balance comes down. Pricing is usually based on what you draw, though some lines also charge draw fees, maintenance fees or inactivity fees. Read the fee schedule, not just the rate.
Lines come in two broad forms. Revolving lines let you draw, repay and redraw for as long as the line stays open. Non-revolving lines let you draw up to the limit once, more like a loan with flexible timing. Some lines are reviewed periodically and can be reduced if your business changes.
Who benefits most from a line of credit?
Businesses with recurring but uneven cash needs benefit most. Think of a contractor who buys materials before each job, a retailer who restocks ahead of seasonal peaks, a professional firm waiting on client invoices, or a hospitality business that carries staff through the shoulder season. The line sits ready so you are not reapplying each time.
- A roofing company draws for materials in spring and repays as jobs close.
- A wholesale supplier covers a large purchase order while waiting on payment.
- A seasonal inn covers repairs and staffing before booking season.
More examples on our construction trades and hospitality and tourism pages.
| Feature | Line of credit | Lump-sum loan or advance |
|---|---|---|
| How you receive funds | Draw as needed up to a limit | All at once |
| What you pay for | Usually the amount drawn, plus any fees | The full amount from day one |
| Best for | Recurring, unpredictable needs | One defined purchase or project |
| Watch out for | Fees when unused; limit reductions | Borrowing more than you need |
What does a line of credit cost?
You typically pay interest or a fee only on the amount drawn, which can make a line cheaper than a lump-sum loan you do not fully use. Costs vary widely by provider and by your financial profile. Watch for fees charged whether or not you draw, and compare the total cost of a typical draw.
A simple way to compare: pick a realistic draw, such as covering one month of payroll, and ask each provider what that draw would cost in total, including fees, if repaid on their schedule. That turns different pricing styles into one comparable number. Our guide to comparing funding offers walks through it.
When is a line of credit the wrong tool?
A line is a poor fit for a single large purchase with a long life, such as equipment or a full build-out, because a term product usually prices that better. It is also risky when used to cover ongoing losses, because a maxed-out line with no plan to repay leaves you with a payment and no cushion.
For a one-time project, compare a term loan. For equipment, look at equipment financing. If you need cash once for a short gap and do not expect to need it again, working capital may be simpler to arrange.
What do funders review for a line of credit?
Funders want confidence that the business can repay across the whole year, not just in a good month. Requirements vary by product and funder; many look at time in business, monthly revenue and credit. Because a line stays open, some providers also review your business periodically after it is opened.
Having clean, current bank statements and a clear explanation of your seasonal pattern helps. If your business operates in more than one state, note each location on your application; state rules on cost disclosures can shape the paperwork you receive. See our state guides for more.
Frequently asked questions
Is a business line of credit secured?
It can be either. Some lines are unsecured, while others are secured by business assets or receivables. Many providers file a general lien on business assets and ask for a personal guarantee even on unsecured lines. The agreement will describe what secures the line, so read that section carefully.
How quickly can I draw after approval?
Once a line is open, many providers transfer draws to your business bank account quickly, often within a business day or two depending on the provider and bank. The initial review to open the line usually takes longer than a single draw, since the funder reviews the full business first.
Does an unused line cost anything?
Sometimes. Some lines charge nothing when unused, while others charge an annual, monthly or inactivity fee. Ask for the complete fee schedule before you open the line so you can compare the cost of keeping it available against how often you expect to use it.
Can a line of credit be reduced or closed?
Yes. Many agreements allow the provider to review the business and reduce or close the line if revenue drops or the risk profile changes. Plan as if the line could shrink during a downturn, and avoid relying on it as your only cushion for emergencies.
Keep credit ready for the next need
Apply once to see whether a line of credit fits your business and cash flow.
Updated September 14, 2026 · 50 States Funding Team