Business Line of Credit

A business line of credit is a revolving loan. The lender sets a maximum amount, and the business draws money when it needs it, repays it and can draw again, as long as the line is open and in good standing. Interest is charged only on the amount drawn, not on the full limit.

Here is a simple example. A wholesaler has a $500,000 line. In March it draws $200,000 to buy stock for the busy season. It pays interest on $200,000, and $300,000 is still available. In June, customers pay their invoices and the wholesaler repays $150,000. Its balance drops to $50,000 and available credit goes back up to $450,000.

Lines are often tied to a variable rate and set to run for one year, then reviewed and renewed. Some are secured by receivables and inventory, with the amount available capped by a borrowing base. In the US, the Small Business Administration's (SBA) CAPLines program offers government-backed versions for seasonal and working capital needs.

Why it matters for lenders

A line of credit is meant to fund short-term needs that turn back into cash, such as inventory that gets sold or invoices that get paid. When that cycle works, the balance rises and falls. When it does not, the line can quietly become permanent debt that the business cannot pay down. US bank examiners expect seasonal advances to be repaid by the end of the season. Many lenders require a "clean-up period," when the balance must drop to zero or near zero for a set number of days each year.

Lines also carry more servicing work than a term loan. Each draw is a loan disbursement that must be checked against the limit, the borrowing base and any covenant breach. Interest changes daily as the balance moves. Renewal needs fresh financials and a new credit review.

How it works in practice

A community development financial institution (CDFI) offers a revolving line to a small food distributor. Each month the borrower uploads an accounts receivable aging report. The lender's system calculates the eligible collateral and the amount available to draw.

When the borrower requests a draw, staff confirm that it stays within the limit and the borrowing base, that no covenant is in breach, and that a second person approves it above a set amount. The funds go out the same day, and the balance and interest accrual update on the loan.

In a spreadsheet, draws and repayments are often entered late or twice. The available balance drifts from reality, and nobody notices that the line has not cleaned up in two years. A system that records every draw and payment as it happens shows usage trends at a glance.