How Does a Business Line of Credit Work?
What a business line of credit is, how draws and repayment work, what lenders look for and when a line beats a term loan.
By the CFUND advisory team · 5 min read
The basics
A lender approves a credit limit — say $100,000. You can draw any amount up to that limit, whenever you need it. If you draw $30,000, you pay interest on $30,000, not the full $100,000. Repay it and your full limit is available again.
Revolving vs. non-revolving lines
- Revolving: repaid funds become available again, like a credit card
- Non-revolving: once you draw and repay, that money doesn't come back
- Some lines renew each year; others have a set end date
How repayment works
Repayment depends on the lender. Bank lines often require monthly interest payments with the balance due at renewal. Many online and alternative lenders repay each draw over a set period — commonly 6 to 24 months — with weekly or monthly payments. Some charge a factor rate instead of an interest rate, so compare the total cost in dollars, not just the headline number.
What lenders look at
- Time in business
- Monthly revenue and bank statements
- Personal and business credit
- Existing debt and cash flow
- Collateral, for larger or secured lines
Line of credit or term loan?
Use a line of credit for recurring or unpredictable needs: payroll gaps, inventory, seasonal swings, unexpected repairs. Use a term loan or equipment financing for a single large purchase you'll pay off over years. Using a short-term line for long-term assets is one of the most common ways businesses squeeze their cash flow.