In This Article
What Is a Business Line of Credit?
A business line of credit (LOC) is a flexible financing arrangement that gives you access to a set amount of funds that you can draw from as needed. Unlike a term loan where you receive a lump sum, a LOC lets you borrow only what you need, when you need it. You only pay interest on the amount you've actually drawn — not the full credit limit. Once you repay, those funds become available again, making it "revolving" credit.
Secured vs. Unsecured Lines of Credit
A secured line of credit is backed by collateral — typically business assets, equipment, or real estate. Because the lender has an asset to fall back on, secured LOCs usually offer higher limits and lower interest rates. An unsecured line of credit requires no collateral but typically comes with lower limits, higher rates, and stricter qualification requirements. For many small businesses, an unsecured LOC in the $25,000-$250,000 range is the sweet spot.
How to Qualify
Qualification depends on the lender, but most look at: time in business (typically 1+ years), annual revenue ($100K+), credit score (600+ for most, 700+ for the best rates), and your debt-to-income ratio. Traditional banks have the strictest requirements but offer the best rates. Online lenders and fintech platforms offer more flexibility with faster approvals but at higher costs. Brobas matches you with the right lender for your specific profile.
How to Use a Business Line of Credit
The most effective uses include: covering payroll during slow periods, purchasing inventory ahead of a busy season, handling unexpected repairs or expenses, bridging gaps between invoicing and payment, and funding short-term growth opportunities. Avoid using a LOC for long-term investments like equipment purchases — a term loan or equipment financing is typically more cost-effective for those.
Pros & Cons
Pros
- Pay interest only on what you draw
- Revolving — reuse funds as you repay
- Flexible for various business needs
- Builds business credit history
- Quick access once approved
Cons
- Variable interest rates can increase
- Annual fees on some products
- Temptation to over-borrow
- Requires discipline to manage
- Lower limits than term loans
Key Terms to Know
Best For
- Managing cash flow fluctuations
- Seasonal businesses
- Companies with recurring short-term capital needs
- Businesses building credit history
Business Line of Credit vs. Merchant Cash Advance
How do these two options compare?
A line of credit charges 7-15% APR on drawn amounts vs an MCA's 40-150% effective APR on the full advance. LOCs are revolving and reusable; MCAs are one-time. However, MCAs approve faster (24-48hrs vs 1-3 weeks) and accept lower credit scores (500+ vs 600+). Choose a LOC for ongoing needs; an MCA for emergency speed.
Read about Merchant Cash Advance