What Is a Business Line of Credit?

A business line of credit is a revolving credit arrangement with an approved borrowing limit. Many small business employers keep one open to smooth out cash flow timing, such as covering expenses while customer payments are still on the way.

How a Business Line of Credit Differs From a Loan or Credit Card

Some lenders may call it a business credit line. Whatever the name, its defining feature is reuse. A term loan pays out one lump sum, and the business repays it on a fixed schedule whether it needed every dollar or not. A line of credit stays open, so the business can tap it whenever a need comes up. A business credit card also revolves, but it’s built for purchases rather than moving cash into a business bank account.

How Does a Business Line of Credit Work?

The lender reviews the application and approves a credit limit. The business draws funds as needed and repays them, and each repayment restores that amount of available credit. Many lines have a draw period, when the business can borrow, followed by a repayment period, when it pays down what remains. The lender sets the length of each period and the payment terms.

Interest is only part of the cost. Lenders may also charge origination, annual, maintenance, or draw fees, so comparing the full cost of a line before signing can help avoid surprises.

Example: A business has a $50,000 line of credit. It draws $12,000 to cover payroll while waiting on customer payments.

• Available credit after the draw: $50,000 − $12,000 = $38,000
• Interest accrues on the $12,000 drawn, not on the full $50,000
• Balance after a $5,000 repayment: $12,000 − $5,000 = $7,000
• Available credit after the repayment: $50,000 − $7,000 = $43,000

Types of Business Lines of Credit

• Secured: Backed by collateral such as equipment, inventory, or receivables. Collateral lowers the lender’s risk, which can make approval easier and costs lower.
• Unsecured: No collateral required. Generally, comes with stricter approval standards and higher costs, and lenders often ask for a personal guarantee.
• Revolving vs. non-revolving: A revolving line restores credit as it’s repaid. A non-revolving line closes once the funds are drawn and paid back.
• Operating line of credit: A common term for a line that funds day-to-day working capital, such as payroll, rent, and inventory.

What Lenders Look For

Getting a business line of credit starts with showing a lender the business can repay. Requirements vary by lender, but most include these factors:

• Personal and business credit history
• Revenue and cash flow
• Time in business
• Collateral, for secured lines
• How the business plans to use the funds

These factors also shape how much credit a business receives. Small businesses can apply through banks, credit unions, SBA-backed lenders, and online lenders.

When a Line of Credit Fits a Small Business Employer

A line of credit tends to fit when a cash need is real but temporary. Seasonal businesses use one for slow months, others use it to bridge the gap between invoices and getting paid, or to keep payroll on schedule when receivables run late.

For ongoing operating losses, borrowing can deepen the problem without fixing the cause. Business owners should always weigh the risks: many lines carry variable rates, fees add to the total cost, and a personal guarantee can put personal assets at risk.

How Paychex Can Help

Small business owners don’t have to search for financing alone. The Paychex Small Business Loan Center partners with Biz2Credit, a third-party lending marketplace, where a funding specialist helps each business find and compare options that fit its needs.