Line of Credit Explainer
A business line of credit allows a borrower to draw funds up to an approved limit, repay them, and usually borrow again while the facility remains available. It is commonly used for seasonal working capital, inventory, payroll timing, or temporary gaps between paying suppliers and collecting customers.
Interest is generally charged on the amount drawn, while commitment or unused-line fees may apply to the remaining limit. Facilities can be secured by receivables, inventory, or other assets, or may rely more heavily on credit strength and guarantees. The agreement controls eligible uses and repayment.
Lenders may monitor a borrowing base, financial covenants, reporting, collateral, and periodic renewal. Availability can shrink if receivables become ineligible or inventory values fall. Some lines require a cleanup period in which the balance returns to zero, demonstrating that the loan is not quietly financing a permanent need.
A credit line is backup capacity, not cash owned by the business. Renewal is not guaranteed, variable rates can increase cost, and covenant breaches can restrict access. Forecast draws and repayments, preserve headroom, understand default terms, and match long-lived investments with appropriate long-term financing.
Borrow, repay, and redraw within the approved limit and agreement period.
Interest usually applies to the outstanding balance, with possible additional fees.
Collateral eligibility, borrowing-base formulas, covenants, and lender review can change usable capacity.
The stated limit may exceed the amount currently available.
Use short-term credit for temporary working-capital timing, not automatically for permanent assets.
Plan for renewal, rate changes, and a loss of access.
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