A business line of credit loan can be the difference between pausing your operations to wait for funds and moving ahead when you see an opportunity. In a 2025 survey, 35% of US small business owners said they had applied for a new business loan or line of credit in the past year. If you’ve ever had to juggle payroll while waiting for a large invoice to clear or wanted to stock up ahead of a busy season without draining your cash reserves, you can likely understand the appeal of this type of loan.

Before you use a business line of credit, you should understand how it works, how it differs from other financing tools, and what to assess. Here’s what you should know.

What’s in this article?

• What is a business line of credit loan?
  
• How does a business line of credit work?
  
• What are the advantages of using a business line of credit?
  
• What are the risks or challenges of a business line of credit?
  
• What are the eligibility criteria for line of credit loans?
  
• How do businesses use lines of credit for short-term needs?
  
• How do business lines of credit compare to other types of loans?
  
• How Stripe Capital can help
  

What is a business line of credit loan?

A business line of credit gives your company a flexible way to access funds on demand. Think of it as a revolving account rather than a one-time infusion: once you’re approved for a specific limit, you can draw what you need, when you need it. As you repay the principal, your available balance replenishes, and you don’t start paying interest until you use the funds.

Lenders offer both secured and unsecured lines. Unsecured lines tend to be more common for smaller amounts (typically from $10,000 to $250,000) and don’t require collateral. If you need higher limits, you might have to pledge assets or sign a personal guarantee. Either way, these lines function much like a credit card, but they usually come with lower interest rates and higher limits.

With a line of credit, it’s typical for your lender to assess your credit at least once a year. This gives you the chance to request higher limits, but it also means your spending and repayment habits can impact your continued access.

How does a business line of credit work?

A lender sets a maximum borrowing amount based on your financial history and credit. When you need cash, you transfer the amount you need from the line to your operating account. Interest charges start only on that portion. As you pay back the principal, it becomes available again.

Lines of credit typically have a draw period of up to 24 months. During this time, you can borrow, repay, and borrow again. When the draw period ends, the lender might renew the line, convert any outstanding balance into a term loan, or require you to pay down the remaining balance immediately. It’s important that businesses understand these terms and negotiate them early to avoid surprises later.

Rates are usually tied to market benchmarks and can move up or down. Many lenders also apply fees, such as annual maintenance or draw fees. Lenders will also regularly assess your financial health, often annually or semiannually, to ensure you still meet their criteria. If your revenue grows, you might request an increased limit. If your business performance declines, the lender might reduce your limit or impose stricter terms.

Businesses use lines of credit to even out seasonal dips, finance inventory ahead of busy periods, cover unexpected expenses, or fund short projects that pay back quickly. Because it’s a revolving resource, businesses can adapt it to many situations without reapplying each time.

What are the advantages of using a business line of credit?

A business line of credit has several key benefits for companies that need agility and control over their cash flow. Here’s what you can expect.

Flexible financing

Unlike a fixed loan, a line of credit lets you draw funds for whatever you need—whether that’s covering inventory purchases, hiring staff, funding a marketing campaign, or covering seasonal dips. You can withdraw the amount you need and pay interest only on that portion, which makes a line of credit a versatile tool for day-to-day operations.

Quick access to cash

Traditional bank loans can take weeks for approval and funding, but a credit line is immediately available once it’s set up. When an unplanned expense appears, you can draw funds instantly.

Revolving credit and reusability

Because a business line of credit is a revolving resource, you don’t need to reapply every time you need money. When you pay down what you borrowed, those funds become available again. This cycle helps you keep your credit line ready for the next challenge or opportunity.

A boost for your credit profile

Regular use and timely repayment of a line of credit can help establish or improve your business credit history. Lenders can see that you’re using credit responsibly, which can increase your borrowing capacity over time and improve your rates on future financing.

Unsecured options for small businesses

Many lenders offer unsecured lines, especially for smaller amounts. If you don’t want to put up assets as collateral or don’t own major assets, an unsecured line can provide the funding flexibility you need without tying up property or equipment.

What are the risks or challenges of a business line of credit?

A line of credit can be very convenient, but it comes with responsibilities and potential drawbacks. Understanding these challenges will help you decide whether a business line of credit is the right choice for you—and how to use it responsibly.

Higher interest rates and variable costs

Lines of credit often carry higher interest rates than traditional term loans, especially if they’re unsecured. Rates are typically variable, which means they can rise if market benchmarks move up. Lenders might also charge annual fees, maintenance fees, or draw fees. Make sure you factor these costs into your cash flow planning, so you don’t end up paying more than you expected.

Temptation to overspend

The accessibility of funds can lead some business owners to dip into the line for nonessential expenses or to cover operating costs without a clear repayment plan. Because you can borrow repeatedly, it’s easy to accumulate a balance that’s larger than you planned for.

Strict qualification requirements and ongoing review

Securing a line of credit often means meeting a lender’s minimum credit score, revenue, and time-in-business thresholds. Even after you’re approved, lenders usually conduct annual reviews of your financials. If your revenue declines or your credit score falls, your bank could reduce your limit or close the line entirely. You’ll need to maintain healthy financial habits to keep your access.

Limited borrowing capacity

Lines of credit are designed for short-term or working-capital needs. Your borrowing limit will often be lower than what you could get with a long-term loan, so they’re not ideal for large capital purchases. If you plan to finance major equipment or a long-term expansion, you might need to explore other financing options.

What are the eligibility criteria for line of credit loans?

Getting approved for a business line of credit hinges on meeting certain financial and operational benchmarks. While requirements vary by lender, expect to address the following areas:

• Time in business: Banks and traditional lenders usually prefer to see at least two years of operation, though some fintech providers consider younger businesses. If you’re new, expect more scrutiny or lower limits.

• Credit scores: Lenders typically look at both business and personal credit histories, as they might check the personal credit scores of business owners. Strong credit signals to lenders that you repay debts reliably, which can help secure better terms.

• Revenue and cash flow: Lenders want to see a steady revenue stream. Some set minimum monthly sales thresholds (for example, $10,000 or more) to ensure you can make payments. They’ll also evaluate your debt-to-income ratio to see how much existing debt you’re servicing relative to income.

• Documentation and financials: Prepare to share tax returns, profit and loss statements, balance sheets, and potentially a business plan. Strong documentation demonstrates you have a grip on your finances and helps lenders assess risk.

• Personal guarantees and collateral: Many lines of credit, even unsecured ones, require a personal guarantee from business owners with a substantial stake. Lenders might also secure the line with a lien on business assets or specific collateral for larger credit limits.

Meeting these criteria doesn’t guarantee approval, but they generally form the core of underwriting decisions. The stronger your credit profile and financial track record, the more likely you are to secure a line of credit at competitive rates and terms.

How do businesses use lines of credit for short-term needs?

A line of credit is built to help companies handle everyday cash flow hurdles.

Here are common ways businesses tap their credit lines:

• Covering cash flow gaps: When there’s a lag between paying suppliers and receiving customer payments, a line of credit can cover payroll, rent, or other operating expenses.

• Purchasing inventory and supplies: Retailers and wholesalers often draw funds to stock up ahead of peak seasons. Once sales pick up, they repay the line and free up credit for the next cycle.

• Addressing emergencies: Unplanned events such as equipment failures, property damage, or urgent repairs can disrupt operations. With a line of credit, you can respond to these issues promptly without dipping into reserves.

• Evening out seasonal fluctuations: Businesses with predictable slow periods use lines of credit to stay afloat during lean months and replenish the balance when revenue rebounds.

• Funding marketing campaigns: Short-term promotional efforts often require up-front cash. A line of credit allows you to invest in marketing initiatives and repay as revenue flows in, ensuring you can seize growth opportunities without cash constraints.

How do business lines of credit compare to other types of loans?

Each financing tool serves different purposes. Lines of credit excel at addressing short-term gaps and providing ongoing flexibility, while other instruments might be better for longer-term, high-cost investments or specific cash flow scenarios.

Here’s a closer look at how business lines of credit compare to other financing options:

• Term loans: These provide a lump sum up front, with fixed monthly payments over a set period. You pay interest on the full amount from day one, which makes them suitable for long-term investments such as equipment or expansion. Lines of credit, by contrast, are revolving and cost less to access for short-term needs since you pay interest only on the funds you use.

• Credit cards: Both credit cards and lines of credit are revolving, but credit cards tend to carry higher interest rates and lower limits. Cards can be helpful for travel or small purchases, and they might come with rewards programs. A line of credit typically comes with a larger limit and lower cost, which makes it more suited for bigger working capital expenses.

• Invoice financing and factoring: These allow you to borrow against or sell your outstanding invoices to speed up cash flow. They can be useful when your working capital is tied up in receivables, but the fees can be higher than a line of credit. Additionally, factoring will transfer collection responsibility to the financier, which can affect client relationships.

• Merchant cash advances (MCAs): MCAs provide an up-front sum in exchange for a percentage of future sales. They require minimal paperwork, but factor rates can make them an expensive option over time. Lines of credit usually offer lower overall costs and greater control over repayment.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Stripe Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital’s revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.
  
• Use Stripe’s expertise: Stripe Capital provides custom financing solutions informed by Stripe’s deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth, or get started today.