Key takeaways
- Business lines of credit can help you build business credit while you improve cash flow.
- Lines of credit may have shorter repayment periods than a loan.
- Borrowers should be aware of the associated fees, which can add up quickly.
Cash flow ups and downs can hinder your company’s success, growth and longevity. Many small business owners turn to lines of credit to manage the unpredictability. According to the Federal Reserve’s 2024 Small Business Credit Survey, 40 percent of small businesses applied for a line of credit for funding, compared to 33 percent who pursued a business loan.
A business line of credit offers flexible access to funds, allowing you to borrow as needed, pay interest only on what you use, and reuse it as you repay. But high fees and short repayment terms mean it’s not the right financing option for everyone.
Consider the line of credit pros and cons to help you determine if a business line of credit is a good idea for your funding needs.
Business line of credit pros and cons
Pros
- Can improve cash flow
- May be more easily accessible
- Competitive interest rates
- Builds a relationship with the lender
- May help build business credit
- Several types to choose from
Cons
- Be aware of fees
- May have short repayment terms
- Effective management required to avoid debt cycling
Business line of credit pros
Business lines of credit come with many key advantages that make them worth considering.
Improved cash flow
Past-due invoices and seasonal downturns often lead to cash flow issues in businesses. If you’re experiencing either or are dealing with an unexpected expense, it can be challenging to pay bills, take care of your employees and make investments in your business.
A business line of credit helps improve cash flow by giving you a pool of funds to pull from whenever you face these situations. So you won’t have to pause operations or shut your doors for good.
Accessible
If you were denied a bank loan, it’s likely due to your credit rating, time in business or annual income. However, you could have better luck with a business line of credit, even if you’re a startup or have bad credit, as some lenders have more lenient eligibility requirements.
For example, Fundbox’s line of credit accepts businesses with just three months in business and annual revenue of $30,000, some of the lowest requirements on the market.
Competitive interest rates
Interest rates on business lines of credit tend to be low compared to other types of business loans or business credit cards. You’ll generally qualify for competitive terms on a business line of credit if you meet the lender’s eligibility criteria and have a solid credit rating. But online lenders tend to charge higher rates compared to lines of credit from traditional banks and credit unions.
On average, business lines of credit have APRs ranging from 8 percent to 60 percent or higher. Based on data from the Q1 2025 Small Business Lending Survey, the average rates for new lines of credit were 7.25 percent to 8.17 percent, depending on whether it was a variable- or fixed-rate line of credit at a rural or urban bank. By comparison, the average rates for new term loans ranged from 7.33 percent to 7.99 percent.
Types of rates
Lenders may express line of credit rates in different ways. APR, factor rate or simple interest are common examples you could come across. This can make it harder for you to compare loan options.
To avoid confusion, consider the total interest cost and fees in the loan agreement to figure out which loan is offering you the best terms and rates.
Lender relationships
A business line of credit can help you build a strong relationship with your lender. By managing the credit responsibly, you show that you’re a reliable borrower, which can lead to a higher credit limit, easier renewal or better terms in the future. Opening a business checking account with the same lender can further strengthen the relationship by giving them insight into your cash flow and earning trust.
The lender may also be more lenient the next time you apply for business funding. Or you may qualify for better terms and lower interest rates since you’re already doing business with the lender.
May help build business credit
If the lender reports account activity to the business credit bureaus, you could build business credit with a business line. As your business credit score improves, you could access more funding opportunities and better financing terms.
Options based on your needs
You can choose the right type of lines of credit for your needs. Evaluating each type, considering what you need the line for, and your business’s credit profile and repayment ability before applying can help ensure you get the right line of credit for your business.
Secured and unsecured lines of credit
The two main types of business lines of credit are secured and unsecured. A secured line of credit is for businesses with assets, such as business property, equipment, or inventory, that can be used as collateral. Lenders can seize those assets if you default on the line of credit, which typically means more favorable terms and a higher credit limit.
Unsecured lines of credit and loans don’t require collateral and carry more risk for lenders, which often comes with higher interest rates and stricter eligibility requirements. You may also be required to personally guarantee the debt or agree to a UCC lien on your business assets.
Business line of credit cons
Despite their flexibility, business lines of credit also come with their fair share of drawbacks.
Fees
Business lines of credit may come with a number of loan fees to watch out for. These fees may drive up the overall cost of a business line of credit:
- Origination fee: Some lenders charge an origination fee when you take out a business line of credit. Some lenders may charge a flat fee, or you may have to pay a percentage of your total loan cost. This fee could be as low as 0.5 percent but can jump as high as 5 percent or more.
- Monthly maintenance fee: You may be subject to a fee incurred each month the business line of credit is open.
- Annual fee: Like a monthly maintenance fee, an annual fee may also apply each year the line remains open.
- Draw fee: You could pay a draw fee each time you withdraw from your credit line.
- Wire transfer fee: This fee may apply if you initiate a wire transfer to draw funds.
- Payment processing fee: Online payments come with a processing fee with some lenders.
- Late fee: You may be charged a late fee if you remit payment past the due date (unless a grace period applies).
- Early repayment penalty: Some lenders assess a penalty if you repay the lender before the term ends, while others don’t charge a penalty or even provide an early payment discount.
Calculate loan costs
To calculate the costs of a business line of credit, use a business loan calculator. Input the credit line draw amount, how long you have to repay it and the interest rate. Make sure to select whether it’s simple interest, APR or a factor rate to get an accurate monthly payment estimate. Also, include any additional fees you might have to pay, such as a draw or maintenance fee.
May have short repayment terms
For many business lines of credit, you can only pull funds from a business line of credit during the draw period. Once it ends, the amount you owe is converted to a loan and payable over a set period. The loan term may be brief, depending on the lender, essentially turning your line of credit into a short-term loan. Online lenders often have the shortest repayment periods, anywhere from 6 months to 24 months.
Will need to manage the loan effectively to avoid a cycle of debt
Because you can draw from the line up to your available credit as needed, you can easily get into a cycle of debt if you withdraw multiple times without repaying past loans in a timely manner. You’ll need to manage the debt effectively to stay on top of repayments.
To avoid getting into a cycle of debt, estimate the monthly repayments using a business loan calculator before you make a withdrawal. Then, plug the amount into your business budget and prioritize payments when paying for expenses. Be careful not to make too many withdrawals without a plan for repaying the loans.
How to determine if a business line of credit is right for you
A business line of credit can improve your cash flow, may be more accessible than other funding options and can help you establish a relationship with your lender. But it may come with fees and typically has short repayment terms of two years or less. You should also make sure you can pay off prior draws before making an additional draw to avoid getting into a debt cycle that could spiral out of control and risk your business or personal assets.
A business line of credit may be the right choice for you if you fall into one or more of these situations:
- You need funding that you can access whenever needed
- You have short-term gaps in your cash flow
- You need a low loan amount
- You can pay back funds quickly
- You can adequately manage the line of credit, including whether loan repayments fit into your current budget
Bottom line
Understanding the business line of credit pros and cons is key to deciding whether this financing option fits your business. The best lines of credit can help you build business credit, reinforce your lender relationship and offer better financing terms than other funding alternatives. But fast repayment terms, fees and the potential for debt accumulation could derail your business finances if not properly managed.
Alternatives like term loans, merchant cash advances, or invoice financing may be a better fit depending on your business’s financial health and goals.
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