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Apply in Minutes. Get Funded in Hours.
Apply in Minutes. Get Funded in Hours.
Cash flow gaps happen to nearly every business. A client pays late, inventory costs spike, or an unexpected repair drains your reserves right when payroll is due. A business line of credit gives you a financial cushion for exactly these moments, letting you borrow what you need, when you need it, and pay interest only on what you actually use.
This guide walks through how lines of credit work, when they make the most sense for your business, and how to choose and manage one strategically.
What is a Business Line of Credit?
A business line of credit gives you access to a set amount of money that you can borrow from whenever you need it. Think of it like a credit card for your business, you get approved for a maximum limit, but you only take what you actually use, and you only pay interest on that amount.
Here's where it differs from a traditional loan: with a term loan, you get all the money upfront in one lump sum and start paying interest on the full amount immediately. With a line of credit, you might get approved for $50,000 but only draw $10,000 to cover a supplier payment. You'd pay interest on just that $10,000, not the full $50,000.
The revolving part is what makes this financing option particularly useful. Once you pay back what you borrowed, that money becomes available to borrow again without reapplying. So if you repay that $10,000, you once again have access to your full $50,000 credit limit.
Lines of credit come in two main varieties: secured and unsecured. A secured line requires you to put up collateral, like equipment, inventory, or real estate, to back the credit. An unsecured line doesn't require collateral but typically relies on your business's credit history and revenue to determine approval.
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How Does a Business Line of Credit Work?
Accessing your funds
After approval, most lenders give you several ways to access your money. You can typically transfer funds from an online portal directly to your business bank account, which usually takes one to two business days. Some lenders also provide checks or cards linked to your credit line for faster purchases.
The draw period, which is the time when you can actually pull money from your line usually lasts anywhere from six months to several years. During this window, you can draw funds, pay them back, and draw again as often as your business situation requires.
Understanding interest and repayment
Interest only accrues on what you've actually borrowed. If you have a $100,000 line but you've only used $20,000, you're paying interest solely on that $20,000. This makes a line of credit far more cost-effective than a term loan when you don't need the entire amount right away.
Most business lines carry variable interest rates, which means your rate can shift over time based on market conditions. You'll typically make minimum monthly payments that at least cover the interest charges, though paying down more of the principal reduces your total interest costs and frees up more credit to use.
The revolving credit advantage
As you make payments, that money becomes available to borrow again without going through another application or approval process. This creates an ongoing financial cushion: you know you have capital available whenever unexpected costs pop up or opportunities arise.
Key Benefits of a Business Line of Credit
You only pay for what you use. The biggest advantage here is that idle money doesn't cost you anything. With a traditional loan, you're paying interest on the full amount from day one, even if you don't need all of it yet. A line of credit lets you borrow strategically, which can save you thousands in interest over time. US small businesses with outstanding invoices are currently owed more than $17,500 each on average, creating significant cash flow challenges that lines of credit can help address.
You get immediate access when cash runs tight. Cash flow gaps hit most small businesses at some point, whether from seasonal slowdowns, customers paying late, or surprise expenses. Having a line of credit already set up means you can handle these situations quickly instead of scrambling for financing when you're already stressed.
Repayment works around your revenue. Unlike fixed loan payments that stay the same every month, lines of credit offer more flexibility. You'll have minimum payments to make, but you can pay down more during strong months and stick to minimums during slower periods. This flexibility helps you manage cash flow throughout the year.
Responsible use builds your business credit. When you keep your balance low relative to your limit, ideally under 30%, and make consistent on-time payments, you strengthen your business credit profile. A stronger profile opens doors to higher credit limits and better rates down the road.
You can bridge timing mismatches. Even profitable businesses sometimes face situations where they have to pay expenses before customer payments arrive. A line of credit covers payroll, rent, or supplier invoices during these gaps without draining your cash reserves or damaging relationships with vendors.
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When to Use a Business Line of Credit
Managing seasonal inventory. Retail and product businesses often buy inventory months before peak selling seasons. A line of credit lets you stock up in advance, then pay back what you borrowed as sales roll in. This works particularly well for businesses with predictable seasonal patterns; think holiday retailers or summer tourism companies.
Bridging payroll gaps. Service businesses and contractors sometimes complete work weeks or months before clients pay their invoices. A line of credit covers payroll on time even when receivables lag, which keeps your team paid and avoids late payment penalties.
Seizing growth opportunities. Sometimes chances appear suddenly such as discounted equipment, a new location opening up, or a larger contract than you typically handle. A line of credit lets you act on these opportunities without waiting weeks for traditional loan approval. In fact, 75 percent of small businesses are bypassing traditional banks in favor of non-bank or fintech lenders who offer faster access to flexible financing solutions.
Handling unexpected costs. Equipment breaks down, emergency repairs come up, or supply costs spike unexpectedly. Rather than depleting your cash reserves or maxing out high-interest credit cards, a line of credit provides a more affordable way to cover surprises while preserving your working capital.
Potential Drawbacks and How to Manage Them
Variable rates can increase your costs. Most business lines of credit carry rates that fluctuate with market conditions. Your rate might be competitive when you open the line, but it can climb over time and increase what you're paying. You can manage this by factoring potential rate increases into your budget and paying down balances quickly when rates are low.
Easy access can lead to overborrowing. Having capital at your fingertips sometimes tempts business owners to borrow for non-essential expenses or to cover up deeper cash flow problems. The key is treating your line of credit as a tool for specific business needs, not as an extension of your regular operating budget.
Fees add up beyond interest. Lines of credit often include annual maintenance fees, draw fees, or inactivity fees if you don't use the line regularly. Before accepting any offer, review the complete fee structure and calculate the total borrowing cost, not just the interest rate.
Tip: A business line of credit works best for short-term financing like bridging cash flow gaps, managing seasonal swings, or grabbing time-sensitive opportunities. For long-term investments like major equipment or real estate, a term loan with fixed payments often makes more financial sense.
Business Line of Credit vs Other Financing Options
The right financing depends on how you plan to use the money and your repayment timeline. Lines of credit excel at providing flexible, ongoing access for variable or unpredictable needs. Term loans work better when you know exactly how much you need and can commit to a fixed repayment schedule. Business credit cards offer convenience for smaller purchases but typically carry higher rates if you carry a balance month to month.
Types of Business Lines of Credit
Secured lines require collateral such as equipment, inventory, real estate, or accounts receivable to back the credit. Because the lender can claim an asset if you default, secured lines typically offer higher limits and lower rates. However, you risk losing the collateral if you can't repay what you've borrowed.
Unsecured lines don't require collateral and rely instead on your business's financial strength, credit history, and revenue. These lines are faster to obtain and don't put your assets at risk, but they usually come with lower limits and higher rates to offset the lender's increased risk.
Revenue-based lines tie your borrowing capacity and repayment to your business's revenue performance. As your revenue increases, your available credit may increase too, and repayment is often structured as a percentage of daily or weekly sales. This type aligns well with businesses that have fluctuating income, though it can be more expensive than traditional options.
Eligibility and How to Improve Your Chances
Most lenders look for businesses operating for at least six months to two years, though requirements vary. Annual revenue matters too as many lenders prefer at least $50,000 to $100,000 monthly, depending on the credit limit you're requesting.
Your personal and business credit scores play a major role in approval decisions and the terms you receive. While some lenders work with scores below 600, you'll typically qualify for better rates and higher limits with scores above 650.
To strengthen your application, focus on:
- Improving credit utilization: Keep balances below 30% of your limits across all credit accounts
- Maintaining payment history: Ensure all business and personal debts stay current
- Building revenue consistency: Demonstrate steady or growing income over several months
You'll typically need bank statements, tax returns, profit and loss statements, and sometimes a business plan explaining how you'll use the credit. Having these documents organized speeds up the application considerably.
How to Apply for a Business Line of Credit
Step 1: Review your credit and financial position. Check both your personal and business credit reports for errors and get a clear picture of your current financial standing. Understanding where you stand helps you target lenders whose requirements you're most likely to meet.
Step 2: Compare lenders and terms. Interest rates, fees, credit limits, and repayment terms vary significantly between lenders. Look beyond the advertised rate and calculate the total cost of borrowing, including any maintenance or draw fees.
Step 3: Submit your application. Most lenders now offer online applications that take 10 to 20 minutes to complete. Fundwell offers one that takes less than 3 minutes to complete and provides a full range of business line of credit products. You'll provide basic business information, financial details, and authorize a credit check. Some platforms let you compare multiple offers from different lenders through a single application.
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Step 4: Review and accept your offer. Once approved, carefully review the credit agreement, paying attention to the rate structure, fees, repayment terms, and any penalties for late payments. Make sure you understand exactly what you're agreeing to before signing.
Step 5: Access your funds. After accepting the offer and completing final verification, you'll typically have access to your credit line within a few business days. Set up your preferred method for drawing funds whether that is online transfers, checks, or a linked card.
Ready to secure flexible funding for your business? Fundwell helps you compare multiple line of credit offers through one simple application, giving you transparency and choice without affecting your credit score. Apply now to access the working capital your business needs.
Managing Your Line of Credit Strategically
Keep utilization below 30%. Credit utilization which is the percentage of your available credit you're actually using affects your business credit score. Lenders view businesses that consistently max out their lines as higher risk. Staying below 30% demonstrates financial discipline and can help you qualify for higher limits or better terms later.
Set up automatic payments. Missing even one payment can damage your credit profile and trigger late fees or penalty rates. Automating at least your minimum payment keeps you current, though paying more than the minimum when possible reduces interest costs and frees up available credit faster.
Draw strategically, not habitually. Just because you have access to credit doesn't mean you need to use it constantly. The most successful business owners treat their line of credit as a tool for specific situations such as cash flow gaps, growth opportunities, or emergencies, rather than as part of their regular operating budget.
Frequently Asked Questions About Business Line of Credits
Can I get a business line of credit with bad credit?
Yes, though your options may be more limited and come with higher rates. Some alternative lenders work with businesses that have credit scores below 600, often requiring additional documentation or collateral to offset the risk. Starting with a smaller secured line and building a strong payment history can help you qualify for better terms later.
What are typical interest rates for business lines of credit?
Rates vary widely based on your creditworthiness, whether the line is secured or unsecured, and current market conditions. Rates typically range from 7% to 25% APR, with the most competitive rates going to established businesses with strong credit profiles. Advertised rates often represent the best-case scenario—your actual rate depends on your specific financial situation.
How long does approval take?
Online lenders can often approve applications and fund accounts within 24 to 72 hours, particularly for unsecured lines with lower limits. Traditional banks may take one to several weeks as they conduct more extensive reviews. The timeline also depends on how quickly you can provide requested documentation and complete verification steps.
Do unused credit lines affect my credit score?
Having an unused or minimally used line of credit can actually benefit your score by improving your overall credit utilization ratio. However, some lenders charge inactivity fees if you don't draw from the line within a certain period, so review your agreement terms carefully. As long as you're making any required minimum payments and the account remains in good standing, an unused line generally helps rather than hurts your credit profile.
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