Line of Credit
A flexible borrowing limit a business can draw from, repay, and reuse, paying interest only on the amount outstanding.
Definition
A line of credit is a flexible borrowing arrangement where a lender approves your business for a maximum amount—say $50,000—that you can draw from whenever you need it, repay, and draw again. Unlike a term loan, which hands you a lump sum and a fixed repayment schedule, a line of credit is revolving: you pay interest only on what you have actually drawn, and the available balance replenishes as you repay.
Business lines of credit come secured (backed by assets like receivables or equipment, with lower rates) or unsecured (faster to get, higher rates). Lenders evaluate revenue history, time in business, and credit profile, and many charge small annual or draw fees on top of interest. The smartest time to apply is when your finances look healthy—approval is hardest exactly when you need the money most.
Why It Matters
For a service business, the gap between doing the work and getting paid is the core cash flow problem—you cover payroll and expenses in March for invoices that pay in May. A line of credit bridges those gaps without the drama: draw $15,000 to make payroll while a big invoice is outstanding, repay it the week the payment lands, and pay interest only for the days you used the money.
The discipline is using it for timing problems, not profitability problems. A line that bridges slow-paying invoices gets repaid; a line that subsidizes underpriced work just becomes growing debt. Pair it with a cash flow forecast so you can tell which situation you are in, and treat untouched available credit as insurance—it costs little and turns a missed-payroll emergency into a routine draw.
Examples
- 1
An agency draws $20,000 from its $75,000 line to cover payroll while waiting on a $45,000 invoice, repays it 3 weeks later, and pays about $190 in interest.
- 2
A consultant keeps a $25,000 unsecured line untouched for 11 months, then uses it to smooth a quarter when two clients paid 60 days late.
- 3
A studio compares a $40,000 term loan at fixed monthly payments to a revolving line and picks the line because its cash gaps are seasonal, not permanent.
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