What is a business line of credit and how does it work?

A business line of credit gives you flexible access to funding exactly when needed. Unlike a traditional loan, you don’t receive a lump sum upfront. Instead, you draw only what you need and pay interest on the amount you use. It can help you handle seasonal dips and jump on growth opportunities without locking you into fixed payments.

Understanding a business line of credit

When you use a line of credit, you're only paying interest on what you use and not the full credit limit. This makes it useful for covering short-term costs, managing gaps in cash flow, or handling unexpected expenses without dipping into reserves.

Unlike a traditional loan, you’re not locked into fixed payments. You control how and when to access funds. Lines of credit are the top product for 36% of large banks but only 17% of small banks, showing their growing role in mainstream business lending.

Lenders set your credit limit based on factors like revenue, time in business, and credit history. As you repay, those funds become available again without the need to reapply.

Differences between lines of credit and traditional loans

A traditional small business loan gives you a lump sum with fixed repayment terms. You start paying interest immediately, whether or not you use the full amount. With a line of credit, you borrow only what you need, when you need it, and pay interest on the drawn amount.

Types of lines of credit

Some companies need fast access to working capital to manage cash flow. Others need structured business financing for larger, planned expenses. Lenders offer different types of credit lines to match these needs based on how your small business operates, your assets, and how predictable your revenue is.

Secured business line of credit

A secured business line of credit requires you to back your credit with collateral. That collateral can be inventory, equipment, accounts receivable, or other business assets. If you default, the lender can seize those assets to recover losses.

As the risk is lower for lenders, you can usually qualify for higher limits and lower interest rates. This makes secured lines a practical choice if you need consistent access to capital but don’t want to pay high interest.

If your business owns valuable assets and has a strong repayment plan, this option gives you more leverage. It’s especially common in asset-heavy industries like manufacturing, wholesale, and construction.

Unsecured business line of credit

An unsecured business line of credit does not require you to pledge any assets. Instead, lenders look at your business credit score, revenue, and time in business to determine your eligibility.

This type of credit is ideal if you run a service-based business or operate without heavy equipment or inventory. It’s also helpful if you want to protect your assets while still accessing flexible capital.

As there’s no collateral, lenders take on more risk. That means you usually have higher interest rates, and credit limits are tighter. Still, the tradeoff can be worth it if speed and simplicity matter more than size.

Many fintech lenders now offer unsecured lines with faster credit approvals and minimal paperwork. In 2024, FinTech companies approved 81% of business credit applications, more than double the rate of traditional banks.

Revolving business line of credit

A revolving line of credit gives you ongoing access to funds up to a set limit. As you repay what you borrow, that amount becomes available again without the need to reapply.

This structure is built for flexibility. You can draw funds as needed, repay on your schedule, and reuse the credit as your business needs change. It’s ideal if your cash flow is unpredictable or tied to seasonal cycles.

Most business lines of credit fall into this category. Revolving credit works well if you need to make frequent purchases, manage short-term gaps, or maintain a buffer for unexpected costs. It keeps your capital accessible without locking you into a long-term commitment.

Non-revolving business line of credit

A non-revolving business line of credit gives you a fixed amount of funding option. Once you use and repay it, the account closes. You can’t borrow again without applying for a new line.

This type is useful when you need short-term access to capital without ongoing borrowing. It gives you flexibility on how you use the funds, but you cannot draw again after repayment.

You may get better terms than with a revolving line, like lower fees, fewer conditions, or faster approval, as the lender limits long-term exposure. That makes it a good fit for planned, one-time expenses where you do not need continued access to credit.

How a business line of credit works

Once you are approved for a business line of credit, it works differently than a loan. You do not receive funds all at once. Instead, you draw what you need, repay it, and reuse it without having to start over.

• Step 1: Apply and get approved. To start, you apply through a bank, credit union, or fintech lender. Most of the lenders will ask for your business financials, bank statements, and credit score. Some lenders may also ask for collateral if you are applying for a secured line. Approval of your credit line will depend on your revenue, time in business, and ability to repay.
• Step 2: Access your credit limit. Once the credit line is approved, the lender will set a maximum credit limit. This is the total amount you are allowed to borrow at any one time. For example, if you're approved for $75,000, you can draw any amount up to that limit.
• Step 3: Draw funds on demand. You can access the funds through your lender’s portal or mobile app. Most lenders allow same business day or next-day transfers to your business bank account. You can decide how much to draw and when you want to draw the amount.
• Step 4: Repay what you borrow. Interest is charged only on the amount you draw as you use the line. Most lenders set up monthly repayment schedules, though some allow weekly payments. You can repay early to reduce your interest costs.
• Step 5: Reuse your credit. Once you repay what you have borrowed, your credit limit resets. That means you can draw again without reapplying. This makes it easier to manage cash flow over time and respond to new expenses as they come up. It works like a financial buffer, and the funds are available when you need them and remain idle when you don’t.

Ramp's corporate card offers a built-in alternative if you are looking for similar flexibility without taking on revolving debt. Eligible businesses get access to 30-day charge terms, meaning you can make monthly purchases and pay the balance in full later without paying interest. There’s no personal credit check or founder guarantee, and your available limit refreshes each month, just like a traditional line of credit.

What you need to qualify for a small business line of credit

To get approved for a business line of credit, you must show that your company is financially stable, has consistent revenue, and can manage debt responsibly. Lenders want to see that you are running a healthy business and you can repay what you borrow without risk.

Start with how long you have been in business. Most lenders require at least six months of operations, but some may ask for a full year or more. You're already in a stronger position if you have been in business for over two years. Businesses with over five years under their belt have the highest approval rates.

Next, look at your revenue. Many lenders set a baseline of around $100,000 in annual income. If you fall below that, you might still qualify, especially if your cash flow is steady and your bank account shows consistent deposits. Fintech lenders tend to be more flexible here than traditional banks.

Your credit score also matters to lenders. Most of them will check your personal credit, and they are usually looking for a score of 600 or higher. Some will also check your business credit if you have built a profile. A stronger score can unlock better rates, but qualifying with fair credit is still possible if the rest of your finances are solid.

Be ready to share your documents. At a minimum, you will need to provide recent bank statements, business tax returns, a profit and loss statement, and a balance sheet. Lenders use these to understand your cash flow and see whether you can manage repayments without strain.

You will also need a business bank account. Lenders use it to verify income and transfer funds if you're approved. If you are applying through a fintech platform, you’ll likely connect your account directly during the application process so they can review your financial activity in real-time.

Even if your business is still building credit or does not meet bank-level eligibility requirements, you still have options. Ramp takes a completely different approach. It uses real-time financial data from your business bank account to assess creditworthiness. The underwriting focuses on your cash flow and operating history, so early-stage businesses can access corporate cards even without a perfect score or years of financial statements.

Applying for a business line of credit

A business line of credit is common among growing companies that need flexibility but don’t want to take on long-term debt. The application process is often faster than applying for a business loan. Online lenders can approve and fund credit lines within 1 to 3 days. Traditional banks may take a week or more, depending on how much you're requesting and the complexity of your financials.

• Choose the right lender: Decide whether you want to go through a traditional or online bank. Banks may offer lower rates but usually take longer and require more paperwork. Online lenders tend to move faster and are more flexible with credit scores.
• Complete the application: You’ll need to provide basic information about your business, including your legal name, structure, industry, time in business, and estimated annual revenue. Most lenders also ask for your Employer Identification Number (EIN) and a business bank account.
• Submit financial documents: Lenders typically ask for 3 to 6 months of business bank statements, your most recently filed business tax return, and financial statements such as a profit and loss report and a balance sheet. If you are applying for a secured line, be ready to provide a list of assets as collateral.
• Go through the review process: After you apply, the lender reviews your financials to evaluate risk. They will look at your revenue trends, cash flow, credit history, and ability to repay. Some fintech lenders connect directly to your bank account to pull this data in real-time, which can speed up approval.
• Review your offer: If you are approved, the lender will send you an offer outlining your credit limit, interest rate, repayment terms, and any fees. Smaller lines of credit can be approved in 24 to 72 hours. Larger credit lines may take longer if manual review is required.
• Accept and access funds: Once you accept the offer, your account opens, and your credit line becomes available. You can draw funds as needed, repay what you use, and continue using the line without having to reapply.

How to decide if a business line of credit is the right move

A business line of credit gives you flexible access to working capital without locking you into long-term debt. It’s built to manage cash flow, cover short-term needs, and keep your operations moving.

But not every business owner needs one. A term loan might offer better rates if you’re planning a one-time investment. If you’re consistently running close to your limit or struggling to repay, a credit line may not solve the root problem.

To decide if it’s the right fit, look at how and when you spend. A line of credit works best when your cash flow is healthy but uneven, like during seasonal slowdowns or delayed customer payments. If you have consistent revenue, a clear repayment strategy, and a need for flexible funding, it’s a strong tool to keep in your financial stack.

If your business needs short-term flexibility but wants to avoid interest charges or complex repayment terms, Ramp may be a better fit. With built-in spend controls, automated expense management, and smart repayment reminders, Ramp helps you manage working capital with less manual effort. You get predictable terms and clear visibility into spending without taking on traditional debt.