What a business line of credit actually is
A business line of credit is a revolving credit facility. A lender approves you for a maximum credit limit — say $50,000 — and you draw against it as you need cash, repay what you've drawn, and draw again. You only pay interest on the balance you've actually used, not on the full limit. It's the closest business-financing equivalent to a credit card, but usually with lower rates and direct access to cash (via bank transfer) rather than card purchases.
The defining feature is flexibility. A term loan hands you one lump sum and you repay it on a fixed schedule. A line of credit sits open in the background — you tap it when a gap appears (payroll before a big client pays, an inventory buy, a slow month) and pay it back down when cash comes in. For businesses with lumpy or seasonal cash flow, that revolving structure is often a better match than a one-time loan.
Lines come in two flavors. A secured line is backed by collateral (accounts receivable, inventory, or a deposit) and carries lower rates. An unsecured line has no specific collateral pledged — though almost all business lines require a personal guarantee from the owner — and prices a bit higher to compensate.
How it works day to day
Once approved, you have a draw period during which you can pull funds up to your limit. Say you're approved for $50,000, draw $20,000 to cover an inventory order, and your remaining available credit is $30,000. You pay interest only on that $20,000. When your customer pays and you repay $15,000, your balance drops to $5,000 and your available credit climbs back to $45,000.
Repayment terms vary by lender. Bank lines often run on monthly interest-only payments during the draw period, with principal due at renewal. Online lenders frequently use fixed weekly or monthly payments over a set repayment window (often 6 to 24 months per draw). Read which structure you're getting — it changes your cash-flow math considerably.
Most lines are renewable annually. The lender re-underwrites your business each year and either renews, adjusts your limit, or closes the line. Some charge a small annual maintenance fee or a per-draw fee; factor those into your cost, not just the headline rate.
Illustrative cost, rate, and term ranges
These are illustrative ranges, not quotes — your actual pricing depends on your credit, revenue, time in business, and the lender. Bank and credit-union lines for well-qualified businesses often land somewhere in the range of 8% to 20% APR. Online and fintech lines, which fund faster and accept weaker profiles, commonly run higher — often in the 20% to 60% APR-equivalent range once fees are included.
Credit limits typically range from around $10,000 on the low end to $250,000 or more for established businesses, with some bank lines going well beyond that. Draw repayment windows are commonly 6 to 24 months per draw for online lenders; bank lines often revolve on an annual renewal cycle.
Watch the fees, because they move your true cost: draw fees (a flat percentage each time you pull funds), annual maintenance fees, and inactivity fees on some lines. A line quoted at a low rate but charging a 2% draw fee on frequent small draws can cost more in practice than a slightly higher-rate line with no draw fee. As always, compare total dollars, not just the headline APR.
Who it fits best, and how to qualify
A line of credit fits businesses with recurring, unpredictable, short-term cash needs: covering payroll during a receivables gap, buying inventory ahead of a busy season, or smoothing out a naturally lumpy revenue cycle. It's built for the business that doesn't know exactly when or how much it will need, only that gaps will happen.
Typical qualification requirements — again, illustrative and lender-dependent — often include: 1 to 2+ years in business (some online lenders accept 6 months), annual revenue frequently in the range of $100,000 or more, and a personal credit score commonly 600+ for online lenders and 680+ for bank lines. Banks weigh your credit history and financial statements heavily; online lenders lean more on bank-statement cash flow. Nearly all require a personal guarantee.
Documentation usually includes recent business bank statements, financial statements or tax returns for bank lines, and basic business-formation details. It's a heavier lift than a revenue-based advance but lighter than an SBA loan.
Honest pros and cons
The advantages are real. You pay interest only on what you draw, so an unused line costs little or nothing. The revolving structure means you set it up once and reuse it for years. Rates are generally lower than a merchant cash advance and often lower than a term loan for short-term needs. And having an open line before you need it means capital is ready the day a gap appears.
The drawbacks are equally real. Approval is harder and slower than a revenue-based advance — banks especially can take one to several weeks. Variable rates mean your cost can rise. Limits may be lower than you'd get from a term loan or SBA loan for a large one-time project. Some lenders can reduce or freeze your line if your financials weaken — exactly when you might need it most. And the temptation to treat an open line as free money leads some owners to carry a permanent balance that a term loan would have handled more cheaply.
When a line of credit is the right choice
Choose a line of credit when your need is recurring and unpredictable rather than a single defined purchase. If you're bridging receivables, managing seasonality, or want a safety net you can tap on short notice, the revolving structure is purpose-built for that. If your need is one large, well-defined expense with a clear payback horizon — buying a building, financing a specific piece of equipment, funding a multi-year expansion — a term loan or an SBA loan usually fits better and costs less over that horizon.
And if you need capital in the next 24 to 48 hours and can't wait on bank underwriting, a line of credit probably isn't fast enough; a revenue-based advance may be the only product that moves on your timeline, at a higher cost. See our [term loan guide](/resources/business-term-loan-guide) and the [full financing landscape](/resources/types-of-small-business-financing) to compare, and our [factor rate explainer](/resources/what-is-a-factor-rate) if you're weighing a faster advance against a line.
Commera is a funding advisor, not a single-product lender. We look at your cash-flow pattern and timeline and tell you honestly whether a line of credit, a term loan, or another structure is the right fit — before you sign anything.