Business Line of Credit: How It Works, What It Costs and How to Qualify

Business Finance Guide · Credit

Borrow what you need, when you need it

How a business line of credit works, what it costs and how to get one approved.

43%of loan applicants sought a line of credit, the top product (2025)

36%of small firms use a line of credit regularly

45%of line of credit applicants fully approved

A business line of credit lets you borrow up to a set limit, repay and borrow again, paying interest only on the money you actually use.

It is the most requested form of small business financing. In the Federal Reserve’s 2025 Small Business Credit Survey, 43% of firms that applied for a loan, line of credit or cash advance sought a business line of credit, more than any other product, and 36% of all employer firms used one regularly. Equipment buyers lean on lines too: the Equipment Leasing & Finance Association reports that 14% of U.S. equipment and software acquisitions in 2025 were paid for with lines of credit.

How a line of credit works

A lender approves a maximum amount, such as $100,000. You draw what you need, when you need it, by transfer or check. Interest accrues only on the outstanding balance. As you repay, the available credit refills, like a credit card but usually at a lower rate and with higher limits.

• Draw period: the time you can borrow, often one year, renewed after the lender reviews your financials.
• Variable rate: most lines are priced at a margin over the prime rate, so payments rise and fall with interest rates.
• Payments: many lines require interest-only payments each month, with principal due when cash comes in or at renewal.
• Fees: look for annual fees, draw fees, unused-line fees and late fees.
• Clean-up period: some banks require the balance to be paid to zero for a set number of days each year, to prove the line is not permanent financing.

That example shows the main advantage over a term loan. A $30,000 term loan charges interest on the full amount for its whole term; a line charges for 60 days and then stops when the holiday sales repay it.

Line of credit vs. term loan vs. credit card

Secured or unsecured?

A secured line is backed by collateral such as accounts receivable, inventory or equipment. It usually carries a higher limit and lower rate. An unsecured line relies on your credit and cash flow, and the lender will almost always ask for a personal guarantee. The SBA also backs revolving lines: SBA Express lines of up to $500,000 can have terms of up to 10 years with a 50% SBA guaranty, and SBA CAPLines are built for seasonal and contract-based working capital.

How often lines of credit are approved

Lines were fully approved more often than term loans (37%) and SBA loans (32%), but nearly one in four applicants was denied. Firms that were partially approved often received a smaller limit than they requested; ask the lender what would qualify you for the full amount at renewal.

How to qualify for a business line of credit

Using a line of credit wisely

The best lines of credit pay for themselves. The classic example is inventory bought before a busy season and repaid as it sells, or payroll covered while waiting 30 days for a large customer to pay. In both cases, the money that repays the line is already on its way when you draw it.

The danger is using a line for losses. If you draw every month to cover expenses that revenue never replaces, the balance only grows. At renewal, the lender sees a fully used line and shrinking cash, and may reduce it or ask for repayment. If you find yourself drawing to cover ongoing losses, fix the underlying margins or costs first; our budget guide can help.

Questions to ask before you sign

• What is the rate, and what index is it tied to?
• What fees apply: annual, draw, unused-line, renewal?
• Is the line secured, and by what?
• Is a personal guarantee required, and is it limited?
• How often is the line reviewed and renewed, and what financials are required?
• Is there a clean-up period?
• How fast are draws available, and can I draw online?

Common mistakes

• Waiting until cash is tight to apply. Lenders approve lines based on current strength.
• Keeping the line maxed out. It signals stress and leaves no room for emergencies.
• Ignoring variable rates. Budget for higher payments if rates rise.
• Treating the line as a reserve. It can be reduced; cash cannot.

Key terms

• Revolving credit: credit you can borrow, repay and borrow again up to a limit.
• Draw: a withdrawal from the line.
• Prime rate: a benchmark rate banks use to price many variable-rate business loans.
• Borrowing base: the amount you can draw on a secured line, based on eligible receivables or inventory.
• Renewal: the lender’s periodic review that extends the line for another term.

The bottom line: a business line of credit is one of the most useful tools a small business can have, as long as it funds short, self-repaying needs. Apply while your numbers are strong, use it, repay it and keep a cash reserve alongside it.

Free help in the Sacramento region

You do not have to work through these decisions alone. SCORE Sacramento pairs owners with volunteer mentors, many of them retired executives, bankers and accountants, at no cost. The Sacramento Valley Small Business Development Center offers free one-on-one advising on financing, budgeting and financial statements. The SBA’s Sacramento District Office can explain loan programs and connect you with lenders, and community lenders such as California Capital and Opening Doors serve owners who need smaller loans or extra support. Browse our Business Resources and the free business help guide for more.

Frequently asked questions

Sources

• Federal Reserve Banks: 2026 Report on Employer Firms (2025 Small Business Credit Survey)
• Equipment Leasing & Finance Association: 2026 Horizon Report release
• SBA lender resources: Types of 7(a) loans, terms, guaranty and maximum rates
• Federal Reserve: Selected interest rates (H.15), bank prime loan rate