Quick overview

A line of credit is a revolving borrowing arrangement that acts like a financial safety valve for short-term capital gaps. Use it when you need temporary working capital—for payroll, inventory, seasonality, or to bridge receivables—and you expect to repay shortly. In my practice advising small businesses for 15+ years, LOCs are most valuable when repayments are predictable within a few months and the cost of borrowing is lower than the cost of missed opportunities.

How a line of credit works (concise)

  • Lender approves a maximum credit limit based on creditworthiness and collateral (if any).
  • You draw only the amount you need; interest is charged on the drawn balance, not the full limit.
  • As you repay principal, capacity becomes available to draw again (revolving feature).
  • Terms vary: fixed vs variable rate; interest-only draws early; annual reviews or renewal fees.

(For a deeper primer, see the site’s overview: What Is a Line of Credit and How to Use One Wisely: https://finhelp.io/glossary/what-is-a-line-of-credit-and-how-to-use-one-wisely/.)

Practical use cases

  • Short-term working capital: Cover payroll or vendor bills while waiting on invoices.
  • Seasonal inventory purchases: Buy inventory before peak season and repay with seasonal sales.
  • Timing-sensitive investments: Fund a marketing push or jump on temporary supplier discounts.
    Example: I helped a restaurant use a small business LOC to cover off-season payroll for eight weeks; the business repaid as sales recovered the next month.

Who typically qualifies

  • Small businesses with 12+ months of operating history, steady revenue, and a usable business credit profile.
  • Individuals with good credit and stable income for unsecured personal LOCs; homeowners may qualify for HELOCs at lower rates when using home equity.
  • Lenders evaluate cash flow, credit score, debt service coverage, and collateral (if required). For business lines, SBA resources can help compare options (see SBA CAPLines for short-term solutions: https://finhelp.io/glossary/sba-caplines-short-term-credit-solutions-for-small-businesses/).

Costs and terms to watch

  • Interest rate type: variable rates are common and may rise; fixed-rate LOCs exist but are less common.
  • Fees: origination, renewal/maintenance, unused-commitment, and draw fees can reduce the LOC’s value.
  • Typical 2025 ranges (approx.): personal LOCs often run roughly 8–20% APR; business LOCs commonly range 6–18% depending on credit and collateral. Rates vary widely—shop around and get written terms.

When to choose a line of credit vs a term loan or savings

Risks and common mistakes

  • Overreliance: Treating an LOC as permanent operating capital can create a cycle of dependence.
  • Ignoring fees: Maintenance or unused-commitment fees can make an LOC expensive even if interest looks low.
  • Variable-rate shock: Rising rates can increase payments unexpectedly.
  • Credit impact: High utilization or missed payments hurts credit scores.

Practical checklist before you borrow

  1. Quantify the exact short-term need and repayment source (invoices, seasonal revenue, one-time sale).
  2. Get all fees and rate terms in writing; ask about penalties, renewal conditions, and covenants.
  3. Model best- and worst-case rate scenarios for variable-rate LOCs.
  4. Keep utilization conservative—aim for under 30% of available credit to protect your credit profile.
  5. Compare alternatives (term loan, invoice financing, tapping reserves).

Tax and accounting note

Business interest on LOCs may be deductible under normal business expense rules, subject to IRS limits and tax-law changes—consult your CPA. Do not treat this as tax advice.

Final takeaways

A line of credit is a practical, flexible tool for short-term capital when needs are temporary and repayment is realistic within the near term. It shines for bridging timing gaps, smoothing seasonality, and seizing time-limited opportunities—but requires discipline to avoid long-term dependence.

Professional disclaimer: This article is educational and does not replace individualized financial or tax advice. Consult a certified financial planner, lender, or tax professional for decisions tailored to your situation.

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