Lines of credit are one of the most flexible forms of business financing available. They let you draw funds as needed, pay interest only on what you draw, and borrow again once you repay it. With traditional loans, you receive the full amount as a lump sum and start repaying it immediately, whether or not you’ve actually used it.
That flexibility, though, is a double-edged sword because it can also lead businesses to use their credit line for the wrong kinds of expenses (i.e., long-term expansions and investments).
A line of credit is meant for short-term, recurring needs, not major one-time investments that take years to pay off. Its higher rates make it a pricey way to cover those kinds of expenses.
We wrote this guide covering the best use cases for a business line of credit, so you can use it strategically instead of paying more interest than you have to. We also break down common mistakes we see businesses make, giving you a clear picture of what to avoid.
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1. Covering Payroll or Cash Flow Gaps
The most common use case for a business line of credit is covering expenses like payroll, materials, suppliers, or rent while waiting for clients to pay. You draw the funds now, use them to cover those costs, and repay once the client pays.
A line of credit works here because the gap is short-term and recurring; it isn’t a one-time problem, but a timing mismatch that repeats every cycle, making it a reliable tool for managing cash flow.
For example, staffing agencies typically need to pay employees every two weeks, while their clients settle invoices on 60- to 90-day terms. A line of credit lets them settle payroll on time without waiting on those client payments to clear.
Another example is contractors. They need to buy materials and pay their crew upfront to start a job, but clients don’t pay until the work is finished and invoiced. A line of credit covers those upfront costs, and once the client pays, the contractor repays the balance.
2. Stocking Up on Seasonal Inventory
Retailers like clothing stores, stationery shops, grocery stores, and liquor stores often need to stock up weeks or months before their busiest periods (e.g., Christmas, Easter, back-to-school season), long before the revenue from those sales comes in.
A line of credit lets them draw funds for purchasing inventory now and repay once they’ve sold it.
This use case fits a line of credit well because the need is recurring. Busy seasons come around every year, and a line of credit lets you bridge that same seasonal timing gap without reapplying for financing each time.
3. Capitalizing on Supplier Discounts
Many suppliers offer a discount for paying early. A common structure is 2% off if you pay within 10 days instead of the standard 30. A line of credit lets you draw the funds needed to pay the invoice early, capture the discount, then repay the balance once revenue comes in.
The math favors a line of credit here, since the savings from the inventory discount often outweigh the interest you’ll pay for those few weeks.
On its own, a 2% discount might not sound like much. But since you’re only giving up 20 days of float to earn it, that rate works out to an annualized return north of 35%, far more than the interest you’d pay to draw funds from a line of credit for those extra 20 days.
4. Covering Unexpected, Short-Term Expenses
Every business runs into costs it didn’t plan for: a piece of equipment breaks down, a vendor raises prices without notice, or a rush order comes in. A line of credit lets you draw funds to handle the expense right away, without disrupting your regular operating expenses.
The timing is what makes a line of credit the right call here. These expenses hit quickly and without warning, and regular bank loans can’t fund fast enough.
For example, if a piece of equipment breaks down, drawing from your line of credit lets you fix it immediately and get back to normal operations, rather than delaying the repair and losing revenue.
5. Bridging the Gap Before a Long-Term Loan Closes
Sometimes a real growth opportunity comes with a deadline you can’t control. For example, a piece of equipment on sale for a limited time, a chance to lease a second location before a competitor does, or a bulk purchase discount that expires soon.
The right long-term financing for these, whether that’s an SBA loan, a bank term loan, or one of the many online lenders now offering similar products, often takes 60 to 90 days to close — time that you typically don’t have.
A line of credit fits this gap well because it’s fast to draw from, letting you act on the opportunity now. Once your long-term loan closes in 60 to 90 days, you repay the line of credit with the loan proceeds, effectively using it as a short-term bridge.
For example, if you find a $50,000 piece of equipment on a limited-time discount, you could draw on your line of credit to purchase it immediately. But rather than pay the higher interest rates of a line of credit long-term (20%+), you repay the balance once your SBA loan closes 60 days later.
Mistakes Businesses Make When Using Lines of Credit
Funding Long-Term Expansions or Major Investments
The most common mistake we see businesses make is using a line of credit to fund long-term investments and expenses such as new locations, major equipment purchases, or multi-year expansions.
It’s tempting because the funds are already available and you don’t have to go through a long bank application process, but the higher interest rates and shorter repayment terms on this kind of business financing aren’t designed to carry that kind of debt.
A term loan fits long-term projects better. You get a lower interest rate, a fixed repayment schedule, and terms that align with how long the investment actually takes to pay off, none of which a revolving line of credit is built to offer.
Letting a Balance Sit Instead of Paying It Down
Many businesses fall into the trap of paying only the minimum each month instead of the entire outstanding balance once revenue comes in. Over time, that turns a short-term tool into a long-standing balance that accrues interest indefinitely.
This defeats the purpose of a line of credit. It’s meant to be drawn down and repaid quickly, freeing up your available credit for the next gap, not carried as an ongoing balance. Left unpaid, that balance also often ends up costing more in interest than if you’d financed the same expense with a lower-rate, fixed-term product from the start.
Carrying a high balance month after month can also work against your business credit score. Lenders and credit bureaus both weigh how much of your available credit you’re actually using over time, and a high balance does little to help you build business credit the way disciplined, short-term use does.
We recommend treating repayment as part of the same transaction as the draw; if you pull funds to cover a 30-day gap, plan to repay it in 30 days, rather than settling for the minimum monthly payment.
Maxing Out Your Entire Credit Limit
Drawing your full limit for a legitimate short-term need might solve the immediate problem, but it also removes your safety net for whatever comes next. If an unexpected expense hits while your line is already maxed out, you’re left without the tool you’d normally fall back on.
High utilization can also work against you at renewal. Lenders typically review your line periodically, and consistently running near your limit can signal financial strain in your credit profile, which may lead to a reduced limit or less favorable terms. This risk applies whether you’re working with unsecured lines of credit or a line backed by collateral.
The better approach is to draw only what a specific need requires and leave room in your limit for whatever comes next, rather than treating the full amount as available cash to spend.
Requirements to Qualify for a Business Line of Credit
Eligibility requirements vary significantly depending on where you apply. The most common starting point for most businesses is a bank, though credit unions are a common alternative for businesses that qualify for membership.
To qualify for a bank loan, you typically need:
- A 720+ credit score and a clean credit history
- A low debt-to-income ratio
- Business or personal assets to use as collateral, or a personal guarantee if you’re applying for one of the bank’s unsecured lines of credit
- Significant cash reserves and a strong balance sheet
- Two or more years in operation, with clear time in business documented through tax filings
- A minimum level of annual revenue, among other requirements
These requirements are extremely difficult for most businesses to satisfy, especially for smaller or newer businesses, and as a result, fewer than 13% of businesses that apply at a bank actually qualify.
We designed our criteria differently. Rather than screening businesses out, we built our requirements to be accessible to more of them: just $30,000 or more in monthly revenue, at least 12 months in operation, and a US-based business. As a result, we approve more than 80% of the businesses that apply.
Read more: Business Loan Denied? Here’s How to Get Funded Same-Day
How to Apply for a Business Line of Credit
Applying at a bank is a lengthy process that typically involves:
- Gathering two years of business and personal tax returns
- Preparing financial statements, a balance sheet, and cash flow projections
- Providing collateral documentation for business or personal assets
- Writing up a business plan or explanation of intended use
- Completing a formal application and waiting on credit approval
- Responding to follow-up requests for additional documentation
This entire process, from when you first submitted your application to when you get funded, can take between 60 and 90 days.
Applying with Redline is more straightforward. You can enter a few details into our pricer to see what you qualify for, submit four months of bank statements, and receive multiple line of credit offers in your inbox within the hour, with same-day closing available.
Read more:How to Apply for Revenue-Based Financing
Frequently Asked Questions
What are the best ways to use a business line of credit?
Covering payroll or cash flow gaps while waiting on clients to pay, stocking up on seasonal inventory, capturing early-payment supplier discounts, and handling unexpected expenses. Avoid financing long-term investments like expansions with it, since a term loan is built for that and typically costs less.
How much is the monthly payment for a $100k business loan?
It depends on your rate and term. At 10% APR over 5 years, expect roughly $2,125 a month; over 3 years, closer to $3,225. Shorter terms mean higher payments but less total interest. Confirm exact figures with your lender before committing.
Can I withdraw cash from my business line of credit?
Yes. Once approved, you can draw funds directly into your business bank account, up to your available limit, whenever you need them. You only pay interest on what you withdraw, and once repaid, that amount becomes available to draw again.
How do I apply for a business line of credit?
You’ll choose a lender, submit financial documents, and go through a credit review. Revenue-based lenders often only require a few months of bank statements, while banks ask for tax returns, financial statements, and collateral documentation, which extends the process considerably.
How do business loans work?
A business loan provides a lump sum upfront that you repay on a fixed schedule, with interest accruing on the full amount from day one, whether or not you’ve spent it. This differs from a line of credit, where interest applies only to what you draw.
What is a business term loan?
A term loan is a lump-sum loan repaid in fixed installments over a set period, typically used to finance one-time, long-term investments like equipment or expansions. Unlike a revolving line of credit, once you repay a term loan, the funds aren’t available to borrow again.
What credit score do you need for a business line of credit?
It depends on the lender. Banks typically require a 680 to 720+ credit score and may charge an annual fee on top of that, while online and alternative lenders may approve scores in the 600s with fewer added costs. Some revenue-based lenders skip credit score requirements entirely, qualifying businesses based on monthly revenue instead.
What are the credit limits and repayment terms for Navy Federal’s business lines of credit?
As a credit union, Navy Federal doesn’t publish fixed limits or rates. Its business line of credit prices off the Wall Street Journal Prime Rate based on creditworthiness, while its business checking line of credit carries a fixed 17.90% APR, repaid at 2% of the balance or $20 monthly, whichever is greater.
What would make a line of credit a better financing option than a business loan?
A line of credit fits short-term, recurring needs, like payroll gaps or seasonal expenses, better since you only pay interest on what you draw and can reuse funds once repaid. A business loan suits one-time, long-term investments with a predictable payoff timeline instead.
How do I effectively manage and utilize my business line of credit?
Draw only for short-term, recurring needs, repay balances quickly instead of letting them sit, and avoid maxing out your limit so you have room for the next unexpected expense. Used responsibly over time, it can also help build business credit. Save long-term investments for a term loan instead.