Business lines of credit
A line of credit lets a business borrow what it needs, when it needs it, up to a limit, and pay interest only on what it uses.
- What it is
- A credit limit you can draw from, repay and draw again.
- Interest
- Charged on the amount you’ve drawn, not on the whole limit.
- Rates
- Often variable. The lender sets the rate and any fees.
- Best for
- Recurring or unpredictable short-term needs.
Loan availability, amounts, rates and terms vary by state and lender.
How draws work
Once a lender approves a line, you can move money from it to your business account when you need it, usually online. Some lenders set a minimum draw amount. Each draw is repaid on a schedule, and as you repay, that amount becomes available to draw again. That’s what makes a line revolving.
Some lenders charge a fee for each draw or a yearly or monthly maintenance fee, even when you don’t draw. Ask for every fee before you accept.
Interest is charged on what you draw
This is the main difference from a term loan, where you pay interest on the whole amount from day one. The figures below are an illustration using a made-up 18% APR. They are not a FastLoan or partner rate.
Illustration: a $50,000 line at 18% APR, simple monthly interest
Nothing drawn
- Balance drawn
- $0
- Interest for one month
- $0
Draw $20,000
- Balance drawn
- $20,000
- Interest for one month
- $300
Whole limit drawn
- Balance drawn
- $50,000
- Interest for one month
- $750
If you drew $20,000 and kept that balance for 3 months, you’d pay about $900 in interest, before any fees. Repaying sooner cuts that.
Draw periods and repayment periods
Some lines have a draw period, often a year or more, when you can borrow, followed by a repayment period when you can’t draw and pay down the balance. Others stay open as long as the account is in good standing and the lender renews it. Many short-term lines repay each draw over a fixed number of weeks or months instead.
Ask the lender:
- How long can I draw, and what happens when that period ends?
- How is each draw repaid, and how often are payments taken?
- Is the rate fixed or variable, and what is it tied to?
- Can the lender reduce or close the line, and with how much notice?
Line of credit or term loan?
A line usually fits recurring or uncertain needs: covering payroll while you wait on invoices, buying stock before a busy season, or keeping a cushion for repairs. A term loan usually fits a single, known cost such as equipment or a renovation, where a fixed payment and end date help. Our guide to working capital loans and term loans walks through a worked example.
If a lender quotes a factor rate rather than an APR, the factor rate to APR calculator converts it.
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