A business line of credit (LOC) is one of the most flexible financing tools a business owner can have. Instead of getting one lump sum (like with a term loan), you’re given access to a pool of money you can draw from whenever you need it—like a credit card but with higher limits and often better rates.

Details of a Business Line of Credit

  • Structure: You’re approved for a maximum credit limit. You borrow only what you need, when you need it.

  • Repayment: You only pay interest on the funds you draw, not the entire limit. Once you pay it back, the credit becomes available again (revolving credit).

  • Secured vs. Unsecured:

    • Secured LOC → Backed by collateral (inventory, receivables, equipment).

    • Unsecured LOC → No collateral required but usually has stricter approval and higher interest.

  • Limits: Ranges from $10,000 to several million depending on business size, revenue, and creditworthiness.

  • Rates: Typically variable, tied to prime rate or SOFR + a margin.

  • Duration: Can be short-term (1–2 years, often renewed) or long-term revolving.

Benefits for Business Owners

  1. Cash Flow Flexibility
    Covers gaps when revenue is delayed but expenses can’t wait—like payroll, rent, or vendor bills.

  2. Pay Only for What You Use
    Unlike a lump-sum loan, you’re not stuck paying interest on unused capital.

  3. Revolving Access
    Funds replenish as you repay, giving you continuous access without reapplying for a new loan.

  4. Emergency Safety Net
    Acts as a financial cushion for unexpected expenses or downturns.

  5. Opportunity Capital
    Lets you jump on sudden growth opportunities (bulk inventory discounts, marketing campaigns, equipment purchases) without draining reserves.

  6. Builds Business Credit
    Responsible use improves your business credit profile, making future financing easier and cheaper.

  7. No Fixed Purpose Required
    Unlike equipment or real estate loans, you can use a LOC for almost anything business-related—operations, payroll, marketing, emergencies.

  8. Seasonal Businesses Lifeline
    Perfect for businesses with ups and downs (e.g., retail, construction, tourism) to smooth out seasonal cash flow cycles.

When It Makes Sense

  • You don’t want to borrow all at once but need on-demand access to capital.

  • Your business has variable or seasonal revenue cycles.

  • You want a backup fund without locking into debt you don’t need.

  • You want to build financial credibility for larger financing in the future.