What is a line of credit?
A business line of credit (LOC) works more like a credit card than a loan. The lender approves a maximum limit, and the business draws on it as needed. As balances are repaid, the available credit is restored.
How it works
- Credit limit: the maximum amount you can borrow.
- Draws: take funds when needed, in full or in part.
- Interest: charged only on the outstanding balance, often at a variable rate.
- Fees: may include arrangement, renewal or unused-limit fees.
- Term: usually renewed annually.
Secured vs unsecured
Secured lines are backed by assets such as receivables or inventory and usually offer higher limits and lower rates. Unsecured lines rely on the business's credit profile and may need a personal guarantee.
Common uses
- Covering gaps between paying suppliers and collecting from customers
- Seasonal stock purchases
- Unexpected expenses or opportunities
Line of credit vs term loan
A term loan gives a lump sum repaid on a fixed schedule, better suited to [capital expenditure](/glossary/capital-expenditure). A line of credit is better for short-term, recurring [working capital](/glossary/working-capital) needs.
Accounting
The drawn balance is a [liability](/glossary/liability), usually current. Interest is recorded as an expense when incurred.