Small Business Line of Credit

True Tamplin

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

A business line of credit is like a credit card that lenders provide to businesses.

Small businesses can take advantage of them as well but may be charged more interest if they have a limited credit history. 

However, many lenders offer favorable rates even to very young businesses.

Line of Credit for Small Business

One option for a line of credit that is ideal for small businesses is a secured line of credit. 

If you have property or real estate that you would be willing to secure the LOC with, you may be able to get a higher credit limit and lower interest. 

Other options include online lenders, who typically have lower credit requirements.

Small Business Line of Credit 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