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How Does a Business Line of Credit Work?

A business line of credit works like a credit card: you get a credit limit (e.g., $50k-$500k), draw funds as needed, pay interest only on what you use, and repay to replenish available credit.

  • Draw funds during a draw period (typically 1-2 years) — interest charged only on amounts withdrawn
  • Revolving credit: repayments restore available balance
  • Variable interest rates typically range from 8-25% APR
  • Minimum requirements: 600+ credit score, 6-12 months in business, $10,000+ monthly revenue

How It Works

The process involves four steps: approval for a maximum credit limit based on business metrics, drawing funds during a draw period (typically 1-2 years) with interest charged only on amounts withdrawn, making monthly payments that may be interest-only initially, and reusing credit as repayments are made.

Key Features

A business line of credit offers revolving credit functionality — interest is charged only on outstanding balances. Repayment options are flexible, and interest rates are variable, typically ranging from 8-25% APR.

When to Use a Business Line of Credit

Use cases include managing cash flow gaps, handling unexpected expenses, purchasing inventory, funding growth initiatives, and providing bridge financing.

Line of Credit vs Term Loan

A line of credit provides revolving access to funds with interest charged only on what you draw. A term loan delivers a lump sum repaid on a fixed schedule. Lines of credit are best for ongoing working capital needs; term loans are better for one-time investments.

Qualification Requirements

Minimum requirements include a credit score of 600+ (some lenders accept 500+), six to twelve months in business, monthly revenue of at least $10,000, and an active business bank account.

Frequently asked questions

How much can I borrow?
Credit limits typically range from $25k-$500k, depending on revenue, credit, and business health.
Do I pay interest if unused?
No interest accrues on undrawn funds; some lenders charge annual maintenance fees.
Can I pay early?
Yes, most allow early repayment without penalties.
What happens after the draw period?
The repayment period begins, typically lasting 1-5 years, with possible renewal options.

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