A line of credit lets you draw cash up to a set limit, repay it and draw again, and you pay interest only on what you use. Lenders size the limit from your revenue, your receivables and inventory, or your cash flow, and they price it from how much risk the line carries and how it is secured.
What a line of credit is for
A line covers timing gaps. You pay suppliers and staff before customers pay you, you carry inventory into a busy season, or you need a cushion for an uneven month. Once customers pay, you repay the line and the limit is available again.
A line is the wrong tool for long term purchases. Buying a building, a major piece of equipment or another business belongs on a term loan, an equipment financing agreement or an SBA loan. Lenders notice when a line stays fully drawn for months, and they treat it as a sign that you are using short term money for long term needs.
How lenders size the limit
Lenders use one of three methods, and the method tells you a lot about the lender.
Revenue based sizing. Many banks and most online lenders start from annual revenue. A common rule of thumb sets the limit at roughly 10 to 15 percent of annual sales for an established business, adjusted for profit and existing debt. Online lenders look at average monthly deposits over recent months and set a smaller limit they can review often.
Borrowing base sizing. Asset based lenders and many commercial banks tie the limit to your collateral. They lend a percentage of eligible receivables (often 70 to 90 percent of invoices under 90 days old) and a lower percentage of eligible inventory. You report the borrowing base monthly or weekly, and your available credit moves with it. This method supports the largest lines for businesses with strong receivables. See asset based lending for more.
Cash flow sizing. For profitable businesses with strong financials, a bank may grant an unsecured or lightly secured line based on earnings. The lender checks that your cash flow could repay the full line if needed.
Whatever the method, the lender also looks at your personal credit, time in business, existing debt and how you have handled credit before. Overdrafts, returned payments and maxed out cards all reduce the limit you are offered.
How lenders price a line
Pricing on a line has more parts than on a term loan. Compare all of them.
Interest rate. Bank and credit union lines are almost always variable, priced at a benchmark such as prime plus a margin. The margin reflects your risk and the collateral. Online lenders may charge a fee per draw or a weekly or monthly rate, which can add up to a much higher effective cost.
Fees. Expect some combination of an origination fee, an annual renewal fee, an unused line fee charged on the part you do not draw, and, for borrowing base lines, collateral monitoring or audit fees.
Security. A line secured by receivables, inventory or a general lien prices lower than an unsecured line. A personal guarantee is standard for small businesses.
Covenants. Bank lines often carry conditions: a minimum coverage ratio, a maximum debt to worth ratio, and sometimes a "clean up" period requiring the balance to drop to zero for a set number of days each year.
| Lender type | Common sizing method | Pricing style | Review cycle | Best fit |
|---|---|---|---|---|
| Bank | Revenue, cash flow or borrowing base | Prime plus a margin | Annual renewal | Established, profitable businesses |
| Credit union | Revenue and cash flow | Prime plus a margin | Annual renewal | Members wanting a local lender |
| Online lender | Monthly deposits | Draw fees or periodic rate | Continuous | Newer businesses needing speed |
| Asset based lender | Borrowing base | Benchmark plus margin and monitoring fees | Monthly reporting | Businesses with large receivables or inventory |
The process and timing
Bank or credit union. Expect two to six weeks. You provide two to three years of tax returns, current financial statements, an accounts receivable aging and a debt schedule. The lender spreads your financials, sets a limit and issues a commitment. Many banks want your operating accounts with them before they approve a line.
Online lender. Expect one to five days. You connect your bank account and accounting software, and the lender sets a limit from your deposit history. Limits start small and grow as you repay on time.
Asset based lender. Expect three to eight weeks for the first line, because the lender runs a field exam on your receivables and an appraisal of your inventory. After that, the line adjusts with each borrowing base report.
Renewal. Most bank lines run for one year and renew after a fresh review of your financials. Send your year end statements early. A late package can leave you with a line that matures before it renews.
Which lenders to approach
- Profitable for two years or more: start with your bank or credit union. Ask for a line at the same time as any term loan, since lenders often want the whole relationship.
- Strong receivables or inventory but thin profits: an asset based lender or a bank with an asset based group will usually offer more room than a revenue based line.
- Under two years in business or need money fast: an online lender or a fintech platform. Start with a small limit and use its track record to qualify for a bank line later.
- Waiting on large customer invoices: compare a line with invoice factoring, which advances cash against specific invoices.
- In Canada: banks and credit unions offer operating lines, and the Canada Small Business Financing Program now covers lines of credit up to $150,000 for working capital through participating lenders. See the Canadian program.
Browse banks and credit unions by place to find a relationship manager near you, such as lenders in California or British Columbia.
Need help choosing a lender? Sign up through BusinessLoanBroker.ai to share your financing needs and get help with your next steps. You can also explore financing guides and tools before you apply.