What a business line of credit is, in one paragraph
A business line of credit is a revolving credit facility that gives your company access to a preapproved pool of capital — say, $100,000 — that you can draw from whenever you need, in whatever increment you need. You pay interest only on the amount you draw, not the full limit. As you repay, the credit becomes available again, just like a credit card. You can use it this month for payroll, pay it back next month, then draw against it three months later for inventory. The limit stays open as long as the facility is active.
That combination — flexible access, pay-as-you-use pricing, reusable capital — is what makes a line of credit the single most versatile financing product available to small business. It's also what makes it different from every other loan you've looked at.
How revolving credit actually works
Most new borrowers expect a line of credit to work like a term loan — you get approved, receive a lump sum, start making payments. It doesn't. Here's what actually happens:
Step 1: Approval and setup
After underwriting, the lender issues you a credit limit. No money moves yet. You sign the facility agreement, which establishes the maximum you can borrow, the interest rate, any fees, and the draw terms. The line is now "open" — but your loan balance is $0.
Step 2: Drawing funds
When you need capital, you request a draw. Most modern lines of credit allow online draws with funds in your bank account within hours. Traditional bank lines may require you to sign paperwork or transfer via a business banking portal. Some lines have a minimum draw size ($1,000–$5,000) and some have no minimum.
Step 3: Interest accrual
Interest starts accruing the day the draw hits your account, and only on the drawn amount. If your limit is $100,000 and you draw $15,000, you're paying interest on $15,000 — not the full limit. Your minimum monthly payment is typically interest only, with the option to pay down principal at any time without penalty.
Step 4: Repayment restores credit
As you repay principal, the credit becomes available to draw again. Repay that $15,000 and your full $100,000 is available. This is the "revolving" part. There's no permanent relationship between a draw and a repayment — you're just managing the outstanding balance against the credit limit.
Step 5: Renewal
Lines of credit have a term (1 to 5 years typically). At the end, the lender reviews your performance and either renews the facility (often with a new limit based on updated financials) or winds it down. As long as you've used the line responsibly, renewals are routine.
Because you only pay interest on drawn amounts, an unused line of credit costs you almost nothing (beyond maintenance fees). This is why sophisticated business owners carry lines of credit they rarely touch — the capacity is there if it's needed, and the carrying cost is minimal.
The three types of business lines of credit
Not all lines are the same. The lender you work with determines almost everything — rate, speed, limit, fees, documentation, renewal terms. The three categories below behave differently enough that you should know which you're actually looking at before comparing quotes.
1. Traditional bank lines of credit
Offered by regional and national banks, typically to established businesses with $500K+ in annual revenue and 2+ years of operating history. These are the cheapest lines of credit available — rates in the Prime + 1–3% range, which translates to roughly 9–11% APR as of 2026. Limits run from $25,000 to $5 million.
The tradeoff: slow underwriting (2–4 weeks typical), heavy documentation (3 years of tax returns, YTD financials, debt schedules), and relationship requirements (many banks require you to move your operating accounts to them before extending credit). Not available if your credit is below 680, your business is under 2 years old, or your industry is outside their appetite.
2. Online / alternative lines of credit
Offered by fintech lenders like Bluevine, OnDeck, Fundbox, Kabbage (now American Express Business Blueprint), and others. These exist to serve businesses that banks won't approve — smaller revenue, shorter history, lower credit. Rates run 15–25% APR, occasionally higher. Limits typically $10,000–$500,000.
The tradeoff: you pay more, sometimes substantially more, but the process is dramatically faster (often 1–3 business days), documentation is lighter, and approval criteria are more forgiving. Many online lenders now also offer more competitive rates for well-qualified borrowers who want speed more than bank-level pricing.
3. SBA Express lines of credit
A SBA 7(a) Express line of credit is government-guaranteed like the standard SBA loan, but structured as a revolving facility and underwritten faster. Limits up to $500,000. Terms up to 10 years. Rates capped by SBA at Prime + 4.5–6.5% depending on size.
The SBA Express line is underused and often misunderstood. It sits in the sweet spot between expensive online lines and slow bank lines — rates are closer to bank pricing but the process is materially faster (30–45 days typical). If you qualify for SBA, an Express line is almost always worth considering alongside a standard bank LOC.
| Type | Typical APR | Limit | Time to Fund | Best For |
|---|---|---|---|---|
| Traditional Bank | 9–12% | $25K–$5M | 2–4 weeks | Established businesses, banking relationships, lowest cost |
| Online / Alternative | 15–25% | $10K–$500K | 1–3 days | Speed, flexibility, lower qualification bar |
| SBA Express | 11–14% | Up to $500K | 30–45 days | Middle ground: bank-like rates, faster process |
Line of credit vs. term loan: which is right for you?
This is the single most important decision in business financing, and most business owners get it wrong — either by taking a term loan when a line of credit would have been cheaper, or by running a line of credit for a need that was really a term loan in disguise.
The rule is simple: match the structure of the loan to the structure of the need.
Use a line of credit when:
- Your capital need is variable or recurring — payroll gaps, seasonal inventory, project-based working capital
- You don't know the exact amount or timing — "we might need cash over the next 6 months" is classic LOC territory
- You'll pay it back relatively quickly — within 30–180 days on each draw, so total interest stays low
- You want the credit available but don't want to pay interest on unused capital
Use a term loan when:
- You know the exact amount you need and when you need it — equipment purchase, business acquisition, real estate
- You'll hold the debt for a long time — 5+ years, where a fixed payment schedule provides budgeting certainty
- Your use produces predictable return — financing a specific asset or investment with known economics
- You want a locked rate and payment — term loans can be fixed; most lines of credit are variable
A $60K term loan at 11% APR over 3 years costs $1,964/month and $10,700 in total interest — whether you need the money or not. A $60K line of credit at 13% APR, drawn for 3 months at a time then paid down for 3 months, might generate $400–$800 in total interest in the same year. Match structure to need.
What lenders actually check for qualification
Every lender has slightly different criteria, but the five variables below determine the vast majority of approval decisions across traditional, online, and SBA lenders.
Personal credit score
The single biggest factor. Expect the following rough bar:
- Traditional bank LOC: 680+ personal FICO
- SBA Express LOC: 640+ personal FICO
- Online/alternative LOC: 580–650 depending on lender
If you have multiple owners with 20%+ stakes, most lenders check the lowest credit score among them, not the average. A strong primary and a weak partner can still kill an application.
Time in business
- Traditional bank LOC: 2+ years typical, 3+ years for larger limits
- SBA Express: typically 2+ years, though strong applicants can qualify earlier
- Online/alternative: 6–12 months minimum for most, with some lenders down to 3 months for specific products
Annual revenue
Most LOCs require $100,000 in annual revenue minimum, with stronger terms at $500K and $1M+. Revenue trends matter almost as much as the absolute number — a business growing from $300K to $500K in two years looks stronger than a business flat at $600K.
Debt service coverage ratio (DSCR)
Lenders calculate how much cash flow your business generates relative to existing and proposed debt service. A DSCR below 1.25 generally triggers decline; above 1.5 gets you into favorable tiers. This is why reducing existing debt before applying can dramatically improve both your approval odds and your rate.
Industry
Some industries are easier to finance than others. Cash-heavy retail, trucking, restaurants, and adult industries face extra scrutiny. Construction, manufacturing, professional services, and medical practices are generally preferred. If your industry is on a lender's "caution list," a broker who knows the market can match you with lenders who actively want your vertical.
How business line of credit rates are actually set
Advertised rates and your actual rate are usually different things. Here's how the math comes together in the underwriting room:
The base rate
Most business lines of credit are variable-rate, tied to a benchmark — usually Prime Rate (bank and SBA lines) or SOFR (some institutional lenders). Your rate is quoted as the base plus a spread: Prime + 2.5%, for example. When Prime moves, your rate moves.
The risk spread
The spread above the base reflects the lender's view of your risk. Three factors drive it:
- Credit tier — 680+ FICO unlocks the best spreads; 620 adds 2–4 percentage points to the spread
- Revenue tier — $1M+ revenue unlocks volume pricing; under $250K pushes you toward the top of the spread range
- Industry and geography — cash-heavy industries, unfamiliar geographies, or specialty businesses add 50–150 basis points
Fixed vs. variable rate lines
Some online lenders offer fixed-rate lines — the rate doesn't move regardless of what Prime does. Fixed-rate lines are usually priced higher than equivalent variable lines at origination (because the lender is absorbing rate risk). In a rising rate environment, fixed can be worth the premium; in a falling rate environment, variable wins.
Compare line of credit vs. term loan math for your business
Our funding specialists run both scenarios side-by-side and explain the total cost tradeoffs. Free, no credit impact.
The fees nobody mentions until closing
Line of credit interest rates are only part of the picture. Here are the fees that routinely show up in LOC facility agreements and what they typically cost:
Origination / setup fee
A one-time fee at account opening, typically 0.5% to 3% of the credit limit. Some bank lines waive this; most online lines don't.
Draw fees
Some online lenders charge a per-draw fee of 1–3% of the draw amount. This can dramatically increase effective cost if you draw small amounts frequently. Traditional banks and SBA lines typically don't charge draw fees — worth checking specifically on any online offer.
Annual / maintenance fee
$150–$500 per year to keep the facility open, regardless of usage. Some banks waive this for customers with qualifying deposit relationships.
Unused line fee
A quarterly or annual fee on the portion of the credit limit you're not drawing against — usually 0.25% to 0.5% annualized. Reasonable when present; avoid lines where this fee is above 0.75%.
Late payment fees
Standard across lenders, usually 5% of the missed payment or $35, whichever is higher. Compound this with potential rate increases on late accounts.
Prepayment penalties
Unusual on lines of credit (since the whole point is flexible repayment), but check specifically on SBA Express lines with 15+ year maturities — the standard SBA prepayment structure may apply.
All-in cost: an example
- Credit limit$100,000
- Advertised APR12%
- Origination fee$1,500 (1.5%)
- Annual maintenance$300
- Unused line fee (0.5%)$250 on unused $50K
- Effective year 1 cost on $50K avg draw$8,050
The application process, start to finish
Application complexity varies enormously by lender type. Here's what each path actually looks like:
Online / alternative LOC application
Typically 10–20 minutes online. You provide business information (EIN, industry, revenue), connect your business bank account for automated underwriting (last 3–6 months of statements), answer basic qualification questions, and submit. Most lenders return a decision within 24 hours and fund within 1–3 business days. Documentation is minimal — often just bank statements and maybe tax returns.
SBA Express LOC application
Similar to a standard SBA 7(a) application but faster because the SBA delegates approval authority to Preferred Lenders. Expect to provide 2–3 years of tax returns, YTD financials, personal financial statements, a business plan or use-of-funds narrative, and SBA forms (1919, 413, debt schedule). Timeline: 30–45 days from complete application to funding.
Traditional bank LOC application
Most formal. In addition to all documents above, expect 3 years of business tax returns, interim financials reviewed (sometimes audited) by a CPA, receivables and payables aging reports, personal tax returns for all 20%+ owners, and a banking relationship discussion (many banks want your operating accounts). Timeline: 2–4 weeks typically, longer if your industry or profile requires escalation.
Smart ways to actually use a line of credit
Lines of credit are unusually forgiving — but they still reward discipline. The businesses that get the most value treat their LOCs as strategic tools, not emergency funds.
Seasonal working capital
A landscaping company with 70% of revenue concentrated in April–October uses its line from January–March to fund payroll and materials, then pays it down as revenue arrives. Total interest for the year: modest. Same need financed via term loan would have cost 4–5x more.
Inventory pre-funding
A retailer who knows Black Friday demand requires $80K in additional inventory ordered in September draws against the line in September, sells the inventory in November, pays down the line in December. Draw period: 90 days. Term loan equivalent would have imposed interest for the full year.
Receivables bridge
A B2B services company with 60-day customer payment terms uses the line to bridge the gap between completing work and receiving payment. Each draw stays out for 60–90 days before the corresponding invoice lands.
Opportunity capital
A business carries a $250K line that sits unused most of the year. When a one-time opportunity appears — buying competitor inventory at 40% off, or acquiring a distressed customer list — the capital is there, ready, at a known cost.
Common mistakes that turn good LOCs into bad decisions
Using a line of credit for long-term capital needs
If you draw $200K and can't pay it back within 12 months, you're paying line-of-credit rates on what is functionally a term loan. Convert it to a term loan and the monthly payment is predictable and the total cost is usually lower.
Running the line at or near the limit constantly
Lenders watch utilization. A business that's at 85–100% of its credit limit for months at a time looks like a business in distress, not a business managing capital. This triggers credit reviews, limit reductions, or non-renewal at the facility end. Keep average utilization under 60% if you want to preserve the relationship.
Accepting the first offer without shopping
Rate differences of 2–6 percentage points between lenders are common for the same borrower profile. On $100K average draw, 4 percentage points is $4,000/year. Shopping costs nothing and pays for itself in the first month.
Missing the fine print on draw structure
Some lines have weekly ACH payments deducted automatically; others are monthly interest-only. Some require paydown to $0 once per year (the "clean-up" provision). Some draw into an account you don't control. Read the facility agreement, or have a broker or attorney read it for you.
Confusing a line of credit with a credit card
They're similar but not the same. LOCs offer much lower rates and higher limits, but fewer protections. Credit cards have statutory consumer protections; commercial LOCs generally don't. Treat the LOC facility agreement with the seriousness you'd treat a term loan.