How a business line of credit works

A term loan pays out once and is repaid on a schedule. A line of credit sets a limit the business can borrow against, repay, and borrow against again. Many businesses use both, for different jobs.

Revolving and term, side by side

Regulation Z's definition of open-end credit, written for consumer credit, describes the mechanics well: the lender expects repeated transactions, may charge a finance charge from time to time on the outstanding unpaid balance, and makes credit available again to the extent the balance is repaid. A business line works the same way, under its own agreement.

Draws and repayment

Terms differ by lender, so read the agreement for:

• How you draw: a transfer to the business account, a check, or a card.
• What you owe each month: interest only, or interest plus part of the balance.
• When it ends: a line may run for a set period, then be renewed, reviewed or paid off.
• The rate: fixed, or tied to an index that moves.
• Fees: for opening the line, keeping it, or each draw.

Expect the lender to look again from time to time. On the SBA's Working Capital Pilot lines (below), the lender must obtain updated financial statements from the borrower every year.

What lenders ask for

• A bank relationship. The SBA notes that business banking usually comes with the option of a line of credit, and lists line of credit interest rates among the things to compare when choosing a bank. See why a business bank account comes first.
• Your credit. For a new business, the SBA notes, loan eligibility is typically based on the owner's personal credit score.
• Collateral. Some lines are tied to what they finance; the SBA's own working capital lines are built on accounts receivable and inventory.
• Your guarantee. A guaranty is an assurance of the future payment of another person's debt; on a business line, that means you pay if the business does not. See personal guarantees.
• Room in the cash flow. Lenders want to see the business carry its payments. The debt service coverage calculator shows the ratio they use.

The SBA's lines of credit

7(a) loans are delivered by SBA 7(a) lenders, and the lender gives you the full list of eligibility requirements for your loan (see SBA loan requirements). Inside the 7(a) program, the SBA's pages describe three ways to get a line:

• CAPLines, an umbrella program for short-term and cyclical working capital needs. The Seasonal CAPLine finances seasonal increases in accounts receivable and inventory; the Contract CAPLine finances the costs of one or more specific contracts; the Builders CAPLine finances small general contractors building or rehabilitating property for resale; the Working CAPLine is an asset-based revolving line for businesses unable to meet the credit standards for long-term credit. Seasonal and Contract lines may be revolving or non-revolving. Except for the Builders CAPLine, the maximum maturity is 10 years.
• The 7(a) Working Capital Pilot, monitored lines of credit of up to $5 million with a maximum maturity of 60 months, for businesses with at least one year of operating history that can produce timely financial statements, receivable and payable agings, and inventory reports.
• SBA Express, loans of up to $500,000, with revolving lines of credit of up to 10 years. Lenders are not required to take collateral on Express loans up to $50,000.

The CAPLines and Express details come from the SBA's page for lenders, which is where it describes them in full; ask your lender which of these it offers.