A commercial line of credit gives a business access to a set amount of money that it can draw on, repay and draw on again, paying interest only on the amount it actually uses. It works more like a standing cash reserve than a one-time loan, which is why companies use it to cover payroll in slow months, buy inventory ahead of a busy season, or bridge the wait between sending an invoice and getting paid.

This guide covers how these credit lines work, the main types, what lenders review, what they cost, and the government-backed options open to small businesses. It also points to the more detailed guides in this section.

How a Commercial Line of Credit Works

The lender approves a maximum limit. You request draws when you need cash, and the outstanding balance accrues interest until you pay it down. Each repayment restores availability, so the same dollars can be borrowed many times over the life of the line.

• Credit limit. The most you can have outstanding at once. Some lines also cap day-to-day availability with a borrowing base tied to receivables or inventory.

• Draw period. The window during which you can borrow. Many bank lines are reviewed for renewal each year, while larger facilities may run for several years.

• Repayment. Most lines require at least monthly interest payments. Some also require scheduled principal reductions or a full payoff at maturity.

• Variable pricing. Rates usually float with a benchmark, so your borrowing cost changes when that benchmark moves.

Because the balance rises and falls, a line suits needs that come and go. A purchase that takes years to pay for itself, such as a building or a major piece of equipment, is usually a better match for a term loan with a fixed repayment schedule.

Main Types of Business Credit Lines

The term business line of credit covers several different structures. They differ mostly in what backs the line and how the lender decides how much you can borrow on a given day.

• Unsecured lines rely on the company's cash flow and credit history, usually with a personal guarantee from the owners. Limits tend to be smaller.

• Secured lines are backed by business assets such as receivables, inventory, equipment or real estate, often through a blanket lien on everything the business owns.

• Working capital lines are sized to the operating cycle and cover short gaps between paying costs and collecting revenue. The Working Capital Line of Credit guide shows how to size one.

• Asset-based lines set availability with a formula applied to eligible receivables and inventory. The Accounts Receivable Line of Credit guide walks through the receivables version.

• Revolving credit facilities are the formal, heavily negotiated version used by mid-sized and larger companies, with committed amounts, fees and financial covenants. See the Revolving Credit Facility guide.

• Corporate lines are larger facilities, sometimes shared among several banks, that serve as a company's core liquidity source. See the Corporate Line of Credit guide.

What Lenders Look At

Underwriting varies by lender type. Banks generally focus on cash flow and history, while asset-based and specialty lenders put more weight on the collateral. Most will review some mix of the following.

• Cash flow. Whether operating cash flow can comfortably cover interest and expected paydowns.

• Time in business and trend. Lenders like a track record and stable or improving revenue and margins.

• Credit history. Business credit reports and, for smaller companies, the owners' personal credit.

• Collateral. The quality and liquidity of the assets backing a secured line.

• Financial reporting. Tax returns, year-end statements and interim results. Larger lines may require reviewed or audited statements.

• Existing debt and liens. Other loans, leases and liens filed against the business, which can limit what a new lender is able to secure.

Expect the agreement to include ongoing conditions, such as delivering financial statements on a schedule, keeping certain ratios within agreed limits, and reporting material changes.

Costs and Fees to Expect

The headline rate is only part of the cost. Pricing on a commercial line of credit typically combines a floating interest rate with several fees.

• Interest on the drawn balance, usually a benchmark such as the prime rate or the Secured Overnight Financing Rate (SOFR) plus a margin.

• Origination or commitment fees charged when the line is opened or renewed.

• Unused line fees on the portion of the limit you do not draw.

• Collateral monitoring costs such as field exams and appraisals on asset-based lines.

• Draw, maintenance or late fees, which are more common with non-bank lenders.

Here is a hypothetical example. A company has a $500,000 line, draws $200,000 and keeps that balance outstanding for a full month at a 9% annual rate. Interest for the month is about $1,500 ($200,000 x 9% / 12). If the line also carries a 0.25% annual fee on the unused $300,000, that adds about $62.50 for the month ($300,000 x 0.25% / 12). Actual pricing depends on the lender, the borrower and market rates.

SBA-Backed Lines for Small Businesses

Small businesses that fall short of a bank's conventional standards may qualify for a line partly guaranteed by the U.S. Small Business Administration. The SBA does not make these loans itself. Participating lenders do, and the guarantee reduces their risk.

• CAPLines is the SBA's umbrella program for short-term and cyclical working capital needs, with loans up to $5 million. Its versions cover seasonal needs, specific contracts and builders' construction costs.

• SBA Express loans, which can be structured as revolving lines, go up to $500,000.

• The 7(a) Working Capital Pilot supports monitored lines of credit tied to receivables, inventory or contracts, with a maximum loan amount of $5 million.

Program rules change from time to time, so confirm current limits, terms and eligibility with the SBA or a participating lender before you apply.

How to Apply and Keep the Line in Good Standing

1. Define the need. Estimate how large your cash gaps get and how long they last, using a month-by-month cash flow forecast for the coming year.

2. Gather documents. Expect to provide several years of tax returns and financial statements, year-to-date results, receivables and payables aging reports, and a schedule of existing debt.

3. Compare structures. Weigh unsecured, secured and asset-based options, and compare total cost rather than the rate alone.

4. Read the agreement closely. Pay attention to covenants, reporting duties, renewal terms and what counts as a default.

5. Use the line as intended. Draw for short-term needs and pay down as cash comes in. A balance that never comes down tells lenders the business may need longer-term capital instead.

6. Stay ahead of renewal. Deliver financial reports on time and raise problems with your lender early.

Related Guides in This Section

Each of these guides covers one part of the topic in more depth:

• Working Capital Line of Credit: how to size a line to your operating cycle and use it with discipline.

• Secured Business Line of Credit: which assets lenders accept, how liens work and what a pledge means.

• Revolving Credit Facility: the key terms, fees and covenants in a committed credit agreement.

• Accounts Receivable Line of Credit: borrowing against unpaid invoices and how availability is calculated.

• Line of Credit vs Term Loan: how to match the financing to the need, with a cost comparison.

• Factoring vs Line of Credit: selling invoices compared with borrowing against them.

• Corporate Line of Credit: structures and negotiating points for larger companies.

Frequently Asked Questions

Is a commercial line of credit the same as a business credit card?
Both are revolving credit, but they serve different purposes. A line of credit typically offers higher limits, deposits draws directly into your bank account, and often carries lower rates for qualified borrowers. Cards are built for everyday purchases rather than funding payroll or large inventory orders.

How long does approval take?
It depends on the lender and the structure. Online and non-bank lenders can move quickly on smaller unsecured lines. Bank and asset-based lines take longer because the lender reviews financial statements and, for secured lines, examines the collateral.

Can a newer business qualify?
It is harder, since most lenders want to see a history of revenue and cash flow. Newer companies may have better odds with a smaller secured line, an SBA-backed program, or financing based on receivables from established customers.

What happens when the line comes up for renewal?
The lender reviews your recent results and how you used the line. It may renew on the same terms, adjust the limit or pricing, add conditions, or decline to renew and ask for the balance to be repaid or converted into a term loan.

Find the Right Credit Line for Your Business

A line of credit works best when it matches how cash actually moves through your company. Review your cash cycle, compare the structures above, and explore the financing options that fit your business today and as it grows.