What is a business line of credit?

A business line of credit offers businesses flexible access to funding. Instead of receiving a lump sum upfront like a traditional loan, you’re approved for a set credit limit and can withdraw only what you need, when you need it, up to that limit. 

Even better, it’s a revolving credit option, meaning once you repay what you’ve used, those funds are available again—ready to support your business whenever needed.

Advantages of a small business line of credit.

Why a Business Line of Credit Works for You

 Pay Interest Only on What You Use 

One major advantage of a business line of credit is that you only pay interest on the funds you actually use—not the entire credit limit. For instance, if you're approved for a $40,000 credit line but only use $20,000 for office upgrades, you'll only pay interest on that $20,000. This makes it a cost-effective and flexible financing option. 

 Versatile for Various Needs

A business line of credit is as flexible as it gets. Whether you're expanding to a new location, need extra working capital, or want a financial safety net for unexpected expenses or seasonal dips in cash flow, a credit line is up to the task. Like a credit card, you can use it for a variety of purposes tailored to your business needs. 

How Does a Line of Credit Work?

Once you're approved for a business line of credit and agree to the lender’s terms, using it is simple. You can withdraw funds as needed to cover business expenses, and even use cash for purchases. Interest accrues only on the amount used, and if the balance isn’t paid off by the end of the statement period, you’ll pay interest.

While it’s great to have access to funds, you should avoid staying too close to your credit limit for too long. This can signal to your lender that your business may be struggling financially. In some cases, lenders may require you to pay down your balance and keep it at zero for a period to show that your business can operate without relying on credit.

In difficult economic conditions, some lenders might ask for the entire balance to be paid off at once. As a result, a business line of credit should not be the sole financial support for your business.

Business Line of Credit Rates

Interest rates typically range from 8% to 60%, with lower rates available for businesses with stronger credit scores. The rate may vary depending on the terms of your agreement, and it could be calculated on a daily, weekly, or monthly basis, rather than annually. Be aware that some lenders also charge annual fees.

If you operate in a high-risk industry—such as restaurants, construction, or seasonal retail—keeping your balance away from your credit limit for extended periods is especially important. Researching your options thoroughly and using a line of credit calculator can help you better understand what you can afford.

Funding and Repayment Process

A line of credit works similarly to a business credit card in that you access funds as needed rather than receiving a lump sum. You only pay interest on the funds you use, and your available credit replenishes as you repay the balance. 

The lender sets a credit limit, and the line of credit is typically renewed as long as your creditworthiness remains in good standing. Most of the time, once a line of credit is established, it stays open until you decide to close it.