How does a business line of credit work?
The lender approves a maximum limit. You draw what you need, when you need it, and pay interest or fees only on the outstanding balance. As you repay, that amount becomes available again. Some lines work like a revolving account; others turn each draw into its own short repayment schedule.
The difference between those two styles matters more than most owners expect:
- Revolving balance: you pay on whatever is outstanding, often monthly, and can repay at any pace above the minimum.
- Draw-by-draw schedule: each draw is repaid over a fixed number of weeks or months, sometimes with its own fee, which behaves more like a series of short loans.
Ask which style you are getting before you compare costs.
When does a line of credit make sense?
A line makes sense for recurring, short gaps where you know money is coming back. A professional firm waiting on client invoices, a wholesaler bridging supplier bills and customer payment terms, or a retailer building stock before a busy season can draw, repay from incoming revenue and draw again next time.
It is less suited to a one-time, long-lived purchase. Using a revolving line for a machine you will repay over years ties up the line you may need for emergencies. For that, equipment financing or a term loan is usually cleaner.
What fees do lines of credit charge?
Common charges include interest on the balance, a fee per draw, an annual or monthly maintenance fee, and sometimes an inactivity fee if you do not use the line. Some lenders charge an origination fee when the line opens. A line with a low headline cost can still be expensive if every draw carries a fee.
- Ask for a full fee schedule in writing.
- Ask whether fees apply if you never draw.
- Ask how interest is calculated on partial repayments.
Can a lender reduce or freeze my line?
Yes, many agreements allow it. Lenders review lines periodically and may lower the limit, freeze draws or decline to renew if revenue falls, credit changes or the account looks riskier. The catch is timing: a line can shrink exactly when a business most needs it, so do not count on it as certain emergency money.
Read the review and renewal section, and ask how much notice you would get. Keeping a separate cash reserve is wise even with an open line.
What liens and guarantees come with a line of credit?
Many lines are secured by a general lien on business assets, recorded through a UCC filing, and most small business lines ask owners to sign a personal guarantee. A blanket lien can make it harder to get other funding while the line is open, so ask what it covers.
See what a UCC-1 lien means and what a personal guarantee covers. When you close the line, confirm in writing that the balance is zero and the lien is terminated. This is general information, not legal advice.
Frequently asked questions
Is a line of credit secured or unsecured?
Both exist. Many business lines are secured by a general lien on business assets, while some smaller lines rely mainly on revenue, credit and a personal guarantee. Even an unsecured line often includes a guarantee, so read what you personally sign.
How is a line of credit different from a business credit card?
A line usually deposits cash to your bank account, which you can use for payroll, rent or suppliers that do not take cards. Credit cards are built for purchases. Costs, limits and repayment structure also differ, so compare the fee schedule of each.
How often are lines of credit reviewed?
Many lenders review lines at least annually and some monitor accounts continuously. A review can lead to a higher limit, no change, a lower limit or non-renewal. Ask how reviews work and what documents you will need to provide.
How fast can a line of credit be opened?
It depends on the lender. Some online lines are decided within a day or two, depending on documents, while bank lines usually take longer and ask for more financial information. Opening one before you need it avoids rushing.
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Updated September 14, 2026 · TrustedBizFunder Funding Team