Business Line of Credit Loan

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 13, 2021

A business line of credit is different from a business loan. 

A loan is a lump sum, whereas a line of credit is an ongoing stream of funds, like a credit card. 

Lines of credit only charge interest on funds that are spent, rather than the whole amount.

Business Line of Credit Loan Forms

The forms needed for a business line of credit application vary from lender to lender, but you can expect to need some or all of the following:

  • Driver’s license or another form of ID
  • Bank statements
  • Balance sheet
  • Profit and loss statements
  • Credit scores
  • Business tax returns
  • Personal tax returns

Traditional Line of Credit Business Loan Description

A business line of credit is an ongoing stream of funds granted to businesses by a lender, traditionally banks. 

The line of credit works like a credit card; businesses have a credit limit, are charged interest on the amount that they spend, and must pay back funds before they can be spent again.

Business Line of Credit Loan FAQs

A line of credit is money lent to an individual or business. If a line of credit is revolving, then the line of credit will replenish as the borrower pays back money borrowed.
The acronym "LOC" stands for Line of Credit.
A revolving line of credit is one which replenishes when the loan is paid off. An example of this is a credit card. A non-revolving line of credit closes once the loan is paid off, such as a student loan.
A loan is typically a lump sum whereas a line of credit is typically revolving which allows for the borrower to draw, repay, and again draw as needed.

Line of Credit (LOC) Definition

What Is a Line of Credit?

A Line of Credit, or LOC, is money lent to an individual or business which the borrower pays interest on.

Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against”their line of credit to make purchases, until the credit limit is reached.

Typically lines of credit are given by banks, such as when an individual is issued a credit card.

What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving

Lines of credit will either remain open, or will close, once the loan has been repaid. 

Revolving lines of credit are considered “revolving”because an individual’s credit is replenished when some or all of the outstanding debt has been paid off. 

In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.

Non-revolving credit usually has a lower interest rate.

How does a Line of Credit Work? Secured vs Unsecured

Loans may be unsecured loans, or secured by collateral

A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan. 

Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.  

Understanding a Credit Line FAQs