Business lines of credit

A business line of credit is an approved limit the business can borrow against when it needs to. Instead of receiving one lump sum, the owner draws what they need, pays interest only on the outstanding balance, and repays on the lender's schedule. Unused credit costs nothing in interest, though there may be fees for keeping the line open.

• Limit: the most that can be outstanding at once, set from revenue, credit and time in business.
• Draw: moving money from the line into the business account. Some lenders set a minimum draw or charge a fee per draw.
• Balance: what is currently owed. Interest accrues on this, not on the limit.
• Available credit: limit minus balance.

On a revolving line, principal repaid becomes available to draw again, like a credit card. On a non-revolving line, the business draws over a period but repaid amounts do not come back; once the limit is used, the line is done.

Repayment structures vary. Bank lines often charge monthly interest on the balance with the principal due at maturity or paid down over time. Many online lenders instead turn each draw into its own short installment loan, repaid weekly or monthly over a fixed number of months, with the repaid principal freeing up the limit. Ask which structure a lender uses, because the merchant's weekly cash need is very different.

A landscaping company has a $100,000 revolving line at 14% a year, with interest charged on the daily balance. In March it draws $40,000 to buy materials for spring jobs.

interest = balance x annual rate x days / 365
30 days on $40,000 = 40,000 x 0.14 x 30 / 365 = $460.27
simple monthly view:  40,000 x 0.14 / 12 = $466.67

In April it draws another $15,000. The balance is now $55,000, so a month's interest is about 55,000 x 0.14 / 12 = $641.67. Available credit is $100,000 - $55,000 = $45,000. In June, customer payments come in and the owner repays $20,000. The balance falls to $35,000, interest falls with it, and available credit rises to $65,000.

Compare that with a $100,000 lump-sum loan at the same rate: the business would pay interest on the full $100,000 from day one, including the $60,000 it did not need yet.

• Origination or opening fee when the line is set up.
• Draw fees, a percentage of each draw, common with online lenders.
• Maintenance or annual fees for keeping the line open, sometimes waived above a usage level.
• Unused line fees on some bank lines, charged on the undrawn portion.
• Annual review or renewal: the lender re-checks financials, often each year. It can renew, reduce the limit, or freeze further draws if revenue drops or payments slip.

Lines generally want more time in business and better credit than advances, and many ask for tax returns or financial statements on top of bank statements. A merchant with steady deposits, no recent NSFs, few or no existing positions and two or more years operating is a good line candidate, especially if the need is recurring rather than one-off.

Set the deal's Product to Line of credit and give your line lenders Line of credit programs, so lender matching checks the file against their criteria. An offer records the limit, the draw, the rate and term, amortizing or interest-only repayment, and any draw or monthly maintenance fee, and the calculator shows the payment on the drawn balance, the total cost and an APR estimate. Draw-level tracking of a client's line balance after funding is not built. See CRM for business line of credit brokers.