Small Business Line of Credit: How It Works and How to Get One
Updated June 2026
A business line of credit is the most flexible financing tool most small businesses will ever use — and one of the most misunderstood. Used well, it smooths out cash flow and covers the unexpected. Used badly, it quietly turns into permanent, expensive debt.
Here's how a line of credit actually works, when it's the right choice, what lenders look for, and how to use one without getting into trouble.
How a Line of Credit Works
Think of a business line of credit like a credit card for your business, but usually with a lower rate and a higher limit. You're approved for a maximum amount — say $50,000 — and you can draw any portion of it whenever you need to. You only pay interest on what you've actually drawn, not the full limit.
The key feature is that it's revolving: as you repay what you've drawn, that credit becomes available again, without reapplying. That makes it ideal for covering payroll in a slow month, bridging the gap while an invoice clears, or handling an unexpected repair — recurring, short-term needs where you don't know the exact amount in advance.
Line of Credit vs. Term Loan
| Line of credit | Term loan | |
|---|---|---|
| How you get the money | Draw what you need, when you need it | Lump sum, all at once |
| Interest | Only on what you've drawn | On the full balance from day one |
| Reusable? | Yes — revolving as you repay | No — one-time |
| Best for | Cash flow gaps, recurring short-term needs | A specific, one-time purchase or project |
| Typical term | Revolving, renewed periodically | Fixed term (1–10 years) |
Secured vs. Unsecured Lines
A secured line of credit is backed by collateral — typically inventory, equipment, or accounts receivable. Because the lender has something to fall back on, secured lines usually offer higher limits and lower rates. The downside: if you default, the lender can seize the pledged asset.
An unsecured line of credit requires no specific collateral. It's faster to set up and simpler, but limits tend to be lower and rates higher. Almost all unsecured lines still require a personal guarantee, which means you're personally on the hook if the business can't pay.
What You Need to Qualify
Requirements vary by lender, but most look for a similar profile:
- Time in business: at least 6–12 months for online lenders, often 2 years for a bank
- Annual revenue: typically $100K+ for online lenders, $250K+ for banks
- Personal credit score: around 620+ for online lenders, 680+ for banks
- Bank statements: 3–6 months showing consistent deposits and a clean balance
These are typical lender requirements, not Holdings requirements. The single biggest lever you control is your bank statements — lenders scrutinize them closely for a line of credit decision.
Where to Get One
You generally have two routes: online lenders (faster, more flexible, more expensive) or traditional banks (cheaper, stricter, slower). The following are referenced for educational comparison only — not endorsements.
| Source | What to know |
|---|---|
| Bluevine | Fast online approval; revenue and time-in-business focused |
| Fundbox | Lower revenue thresholds; quick decisions |
| OnDeck | Established online lender; higher rates, faster funding |
| Traditional banks | Lowest rates, but stricter requirements and slower |
How to Use a Line of Credit Without Getting Into Trouble
The most common mistake is treating a line of credit like a term loan — drawing the full amount, never paying it down, and carrying a permanent balance. That's a warning sign. A line of credit is for short-term gaps, not long-term growth or covering ongoing losses.
A simple discipline: every dollar you draw should have a clear, near-term repayment source — a customer payment that's about to land, a seasonal sales bump, an invoice clearing next month. If you can't name how you'll pay it back within a few months, you may have a revenue problem that more debt won't fix. When debt is used to paper over a structural shortfall, it accelerates the problem rather than solving it.
Lenders Check Your Bank Statements First
For a line of credit, your business bank statements often matter more than your tax return. Lenders want to see steady deposits, a healthy average balance, and clean business-vs-personal separation. Messy or commingled finances are the fastest way to a decline.
Holdings includes free accounting and bookkeeping that gives you the clean, organized financials lenders can actually work with.
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Frequently Asked Questions
What's the difference between a line of credit and a loan?▾
What do I need to qualify for a business line of credit?▾
Is a secured or unsecured line of credit better?▾
Does a business line of credit affect my credit score?▾
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Informational only — not financial, legal, or tax advice. Holdings is a financial technology company, not a lender; we do not offer loans or financing products. Lender names and requirements are referenced for educational purposes only and are not endorsements. Verify all terms directly with the lender.