Cash flow is the lifeblood of any small business. A business line of credit gives you access to money when you need it, up to a set limit, and you only pay interest on what you use. It is a flexible tool for smoothing seasonal swings, buying stock or covering late-paying clients.
How a business line of credit works
- A lender approves you for a maximum limit, for example $20,000.
- You draw money when needed, all at once or in parts.
- You pay interest only on the amount you draw.
- As you repay, that credit becomes available again.
Line of credit vs term loan
| Line of credit | Term loan | |
|---|---|---|
| Funds | Draw as needed | Lump sum upfront |
| Interest | On the amount used | On the full loan |
| Repayment | Flexible, revolving | Fixed schedule |
| Best for | Short-term cash flow gaps | Large one-off purchases |
Smart uses
- Covering payroll or bills while waiting for client payments.
- Buying inventory before a busy season.
- Handling unexpected repairs or opportunities.
- Bridging seasonal revenue dips.
Uses to avoid
- Funding ongoing losses with no plan to fix them.
- Paying owner salaries in a business that is not profitable.
- Long-term investments better suited to a term loan.
Typical requirements
- Time in business, often at least six months to two years.
- Minimum annual revenue.
- Personal and business credit scores.
- Business bank statements and financial records.
- A personal guarantee, especially for newer businesses.
Costs to compare
- Interest rate, fixed or variable.
- Draw fees each time you use the line.
- Annual or maintenance fees.
- Whether the line is secured by business assets.
Model repayment on a draw with our Loan Repayment Calculator.
How to use a business line of credit responsibly
- Have a cash-flow forecast so you know when money comes in.
- Draw only what you need and repay as soon as cash arrives.
- Track it separately in your books; read our guide to bookkeeping for small business.
- Review the line yearly and ask for better terms as your business grows.
Getting approved with a young business
Open a business bank account early and run all revenue through it. Keep personal credit strong. Start with a smaller limit and grow it over time. Some banks and online lenders specialise in newer businesses, but expect higher rates. Track revenue across streams with our Side Hustle Income Tracker so your numbers are ready.
Outside the US
UK banks offer business overdrafts and revolving credit facilities. Canadian banks provide business lines of credit, often requiring a personal guarantee. In Nigeria, banks and some fintechs offer working capital and overdraft facilities to SMEs; confirm lenders are licensed and compare total costs carefully.
Example: using a business line of credit for a seasonal gap
Imagine a small online store that does most of its sales in November and December. In October it needs $8,000 to buy stock. With a business line of credit, the owner draws $8,000, buys inventory, and repays it from holiday sales in December and January.
- Interest is charged only on the $8,000 for the months it is used.
- Once repaid, the full limit is available again for next season.
- A cash-flow forecast showed the repayment plan before borrowing.
Compare that with taking a term loan for the whole year, which would mean paying interest on money not needed for most months. The key is having a clear plan for how and when the borrowed money comes back, and resisting the temptation to treat the line as permanent working capital.
For official, up-to-date guidance, see the U.S. Small Business Administration loan programs.
Frequently asked questions
Does a business line of credit affect my personal credit?
It can if you sign a personal guarantee or if the lender reports to personal credit bureaus.
How fast can I get a business line of credit?
Online lenders can be quick, sometimes days; banks often take longer.
Is a business credit card the same?
Similar, but cards usually have higher rates and are better for small, short-term purchases.
Business line of credit: key takeaways
- Borrow up to a limit and pay interest only on what you use.
- Best for short-term cash flow, not ongoing losses.
- Compare rates, draw fees and guarantees.
- Repay quickly and track it in your books.
Last reviewed: October 2026. This article is general education, not personal financial, tax or legal advice. Rules, rates and limits change, so check official sources or speak to a qualified professional before making decisions. See our Financial Disclaimer.