Business lines of credit, in plain terms

How a line of credit works

A line of credit gives a business an approved limit it can borrow against at any time. You draw what you need, repay it, and draw again — the available credit replenishes as the balance comes down. Interest applies only to the amount actually drawn, not the full limit.

That revolving structure is the whole point: it's capital you keep on standby, ready for the next need, rather than a single lump sum committed to one purpose.

Line of credit vs. term loan

They solve different problems:

• Line of creditRevolving and flexible. Draw as needed, pay for what you use, reuse as you repay. Best for ongoing or unpredictable needs.
• Term loanA single lump sum for a defined, one-time purpose, repaid over a fixed term. Best when the need and cost are specific. How term loans work →

A line is a tool for timing and flexibility; a term loan is a tool for a specific, planned investment.

When a line of credit fits

A line tends to earn its place when cash flow moves unevenly: seasonal businesses, recurring short-term needs, bridging the gap while invoices clear, or simply keeping a buffer for an opportunity or a surprise.

Much of its value is being in place before the need arrives. A line you set up in a steady month is there when a slow one comes — which is the opposite of scrambling for capital under pressure. It's often how a business manages its day-to-day working capital.

What to keep in mind

A line of credit is a timing tool, not a substitute for revenue. Used with discipline — drawn for real short-term needs and paid back down — it keeps a business flexible. Treated as permanent funding, it works against you. The right limit is one that covers genuine gaps without inviting over-reliance.

Common questions