Understanding Business Lines of Credit (2025 Guide)

A business line of credit (LOC) is a revolving funding tool that lets your company draw funds as needed, repay, and draw again—much like a credit card but usually with lower rates and higher limits. You’re typically charged interest only on the amount you use, not on the full credit limit. This guide explains how LOCs work, what lenders look for in 2025, and how to decide if an LOC or a term loan fits your situation.

How a Business Line of Credit Works

• Revolving limit: You receive an approved limit (e.g., $25,000). You can draw, repay, and draw again during the term.
• Interest on what you use: If you draw $10,000 out of a $25,000 limit, you pay interest on $10,000—not $25,000.
• Repayment: Weekly or monthly—some lenders offer interest-only periods with required principal payments later.
• Secured vs. unsecured: Some LOCs require collateral (UCC lien on receivables/inventory/equipment). Others rely on revenue and credit strength.
• Renewal: Lines often have a 6–24 month term and may be reviewed/renewed annually based on performance.

Typical Use Cases

• Cash-flow gaps: Cover payroll or pay suppliers while waiting on receivables.
• Seasonality: Buy inventory ahead of peak periods; repay as sales come in.
• Short-term projects: Fund materials or labor before client payment.
• Opportunistic purchases: Take advantage of vendor discounts without straining cash.

Pros and Cons

• Pros: Pay interest only on what you use; revolving access; flexible timing; can improve cash-flow management.
• Cons: Variable rates; lower limits than term loans; may require periodic financial updates or covenants; fees possible (draw, maintenance, or renewal).

Lines of Credit vs. Term Loans

What Lenders Evaluate (2025 Snapshot)

• Time in business & revenue: Many want 6–12+ months and consistent deposits; stronger revenue improves limits.
• Credit profile: Owner FICO + business credit (D&B/Experian/Equifax Business). Clean history helps.
• Cash-flow health: Bank statements (average daily balances, NSFs, deposit regularity).
• Financials: For larger limits—P&L, balance sheet, tax returns; verify receivables for A/R-secured lines.
• Collateral/PG: Some LOCs require collateral and/or a personal guarantee.

Common Fees & Costs (May Vary)

• Interest: Typically variable; charged on the amount drawn.
• Draw fee: Small percentage per draw with some lenders.
• Maintenance/renewal fee: Periodic fee to keep the line open/renewed.
• Late/NSF fees: Avoid by setting up autopay and monitoring balances.

Example: Cost on a Short-Term Draw

You draw $20,000 for 60 days at a hypothetical 12% APR. Interest ≈ $20,000 × 0.12 × (60/365) ≈ $395. If there’s a 1% draw fee, add $200. Total estimated cost ≈ $595 before any other fees. (For illustration only.)

When a Line of Credit Makes Sense

• Unpredictable timing of receivables
• Seasonal sales cycles that require inventory buys
• Short projects that pay on completion
• You value fast access to working capital vs. one large lump sum

Application Checklist

• Business legal entity, EIN, and bank account
• Last 3–6 months of business bank statements
• Financials for larger lines (P&L, balance sheet, tax returns)
• AR/AP aging (if applying for an asset-based LOC)
• Owner ID; possibly a personal credit pull

Frequently Asked Questions

1) Is a business LOC hard to qualify for?

It depends on time in business, revenue consistency, credit history, and documentation. Newer businesses may start with smaller limits, then grow the line as they demonstrate on-time repayments and stable cash flow.

2) Does an LOC require collateral?

Some do, some don’t. Secured lines use assets like receivables or inventory. Unsecured lines rely more on revenue and credit strength and may carry lower limits or higher rates.

3) How is interest charged on a line of credit?

Interest is typically charged only on the outstanding balance you’ve drawn, calculated daily and billed monthly. If the line is unused, you generally don’t accrue interest (though a maintenance fee may apply with some lenders).

4) What’s better: a line of credit or a term loan?

Use an LOC for flexible, repeat working-capital needs; use a term loan for one-time, long-term investments that you’ll repay over a set schedule. Many businesses use both for different purposes.

5) Can I increase my LOC limit later?

Often yes. Lenders may review your usage, payment history, and updated financials after several months and consider a limit increase if the business performance supports it.

Educational content only. Policies and underwriting vary by lender. Always review current terms and fees.