For many small business owners, cash flow is the biggest challenge. Inconsistent sales, seasonal cycles, or unexpected expenses can leave even healthy businesses scrambling to cover bills. That’s where a business line of credit (LOC) comes in.
Unlike a traditional loan, where you borrow a lump sum and repay it over time, a line of credit gives you flexible access to funds when you need them. But flexibility can come with trade-offs, including higher costs and the temptation to overborrow.
This guide explains how business lines of credit work, the pros and cons, and how to decide if one fits your business in 2025.
What Is a Business Line of Credit?
A business line of credit is a revolving credit account for business expenses. It works like a credit card but with higher limits and lower rates.
- You’re approved for a maximum limit (say $50,000).
- You draw only what you need.
- You pay interest only on the borrowed amount.
- As you repay, funds become available again.
Lines of credit can be secured (backed by collateral) or unsecured (no collateral but higher interest rates).
Types of Business Lines of Credit
- Traditional Bank LOCs
- Often secured, with lower rates.
- Require strong credit and established business history.
- SBA CAPLines
- Government-backed LOCs for seasonal needs, construction, or working capital.
- Online Lender LOCs
- Faster approval, more flexible requirements.
- Often come with higher rates and fees.
- Secured vs. Unsecured
- Secured: Lower cost, requires collateral (property, equipment, receivables).
- Unsecured: Easier access, higher rates, smaller limits.
Pros of Business Lines of Credit
1. Flexibility
Borrow only what you need, when you need it. Ideal for variable expenses.
2. Interest Savings
You pay interest only on funds used, not the total credit limit.
3. Builds Credit
Consistent use and repayment strengthen your business credit profile.
4. Emergency Backstop
Acts as a safety net for unexpected expenses or delayed receivables.
5. Renewable Access
Funds become available again as you repay, unlike term loans.
Cons of Business Lines of Credit
1. Higher Rates and Fees
Rates are often higher than traditional term loans, especially unsecured LOCs.
2. Variable Rates
If tied to prime or SOFR, your cost may rise with interest rate changes.
3. Risk of Overuse
Easy access can encourage overspending and create debt cycles.
4. Renewal Requirements
Many LOCs require annual reviews. If your business struggles, renewal may be denied.
5. Collateral Risk
Secured LOCs put your assets on the line if you default.
Business Lines of Credit in 2025
- Rates: Average 10–20% APR, depending on lender and risk.
- Limits: Range from $10,000 to $500,000.
- Fed impact: September 2025’s rate cut could slightly reduce costs, but small businesses remain sensitive to lender terms.
- Trend: Online LOCs growing in popularity, but often costlier than traditional bank products.
Best Uses for a Business Line of Credit
- Covering payroll during slow months.
- Buying inventory ahead of seasonal demand.
- Managing delayed payments from clients.
- Handling emergency repairs or unexpected expenses.
- Taking advantage of short-term opportunities (discounted supplies, quick growth needs).
When Not to Use a LOC
- Long-term investments like equipment or property (term loans are better).
- Covering consistent losses — this can trap you in debt.
- Large one-time purchases better suited for loans or leases.
Example
Sofia runs a bakery that sees a big surge every holiday season. She secures a $40,000 line of credit.
- In October, she borrows $20,000 to buy extra inventory and staff up.
- By January, she pays it back with holiday profits.
- Interest costs: ~$400.
Without the LOC, Sofia would have missed seasonal sales or relied on expensive credit cards at 25% APR.
How to Qualify
- Strong Credit History
Business and personal credit scores both matter. - Solid Revenue
Lenders often want $50,000+ in annual revenue for smaller LOCs. - Established Business
At least 1–2 years in operation improves approval odds. - Financial Documentation
Tax returns, bank statements, and financial statements. - Collateral
For larger LOCs, be prepared to pledge assets.
Alternatives to Business LOCs
- Business Credit Cards: More perks, but higher interest.
- Term Loans: Better for long-term investments.
- Invoice Financing: Good for businesses with slow-paying clients.
- Merchant Cash Advances: Fast cash, but extremely high cost.
FAQs
Is a business line of credit better than a loan?
It depends. LOCs are better for flexible, short-term needs. Loans are better for fixed, long-term investments.
Can startups get a LOC?
Rarely, unless the owner has strong personal credit or offers collateral.
What’s the difference between secured and unsecured LOCs?
Secured require collateral but are cheaper. Unsecured don’t require collateral but cost more and have lower limits.
How often can I draw from a LOC?
As often as needed, up to your limit, as long as you make payments.
Do LOCs hurt credit?
No, if used responsibly. They can actually build business credit.
Conclusion
A business line of credit is a powerful tool for managing cash flow and keeping operations running smoothly. But like any credit product, it comes with risks.
For businesses that use it strategically — to cover short-term needs, seize opportunities, or handle emergencies — a LOC can provide flexibility and breathing room. For those who treat it like free money, it can become an expensive trap.
In 2025, with borrowing costs still elevated, the key is to shop carefully, borrow responsibly, and use a line of credit only as a tool — not a crutch.
