Line of Credit for Small Business: Pros and Cons

Looking for immediate financing for your small business? We’ll help you decide if a business line of credit might be a good option for you.

Sign up for Advisor. It's free!

What is a Business Line of Credit?

A business line of credit is a financing option that falls somewhere between a business credit card and a term loan. Virtually the only similarity a line of credit has to a small business loan is that it gives access to funds that can be used for day-to-day expenses. Otherwise, a business line of credit is more like a credit card. You don’t have a sum deposited into your account which you then repay with interest on a regular basis. Instead, you draw funds as you need them and accrue interest each time. Lines of credit are also revolving, like credit cards, which means that the amount you repay becomes available again. As with credit cards, your lender will determine a maximum up to which you can withdraw funds at any given time.

Available Lines of Credit

There are several ways to categorize business lines of credit. First, there are secured and unsecured options. These differ based on whether you’ll need to provide collateral. For a secured loan, the lender will have some asset to claim in the case that you default, so you might find that you’re eligible for larger amounts at lower rates. On the flip side, unsecured lines of credit can be quicker and easier but also present more risk to the lender so they can be more expensive.

Another common difference you might find is that with varying qualifications, you’ll be eligible for different maximums and APRs.


Some of the biggest advantages of a business line of credit are that you only pay interest on the funds you use and that the capital is available whenever you need it. You can use the proceeds for a wide variety of business purposes to help maintain your cash flow, from operating expenses to purchases to emergency funds. Another benefit is that most businesses are eligible, even if they’re young or don’t have the highest credit scores. Being consistent and timely with your interest payments can also help you build your business credit so you can work towards obtaining the lowest cost funding options in the future.


The most glaring drawback of business lines of credit is that they can have high interest rates, especially for borrowers with lower credit scores. While they can come in handy for immediate, short-term business needs, they can become costly over time as you withdraw more capital.

If you don’t need emergency capital, consider applying for a more affordable small business financing option, like an SBA loan. With our clear online application and innovative technology, SmartBiz can help you achieve your goals with the low rates and long terms that an SBA loan provides. Pre-qualify and start your application today!

Not sure if you qualify for an SBA loan? Try the new SmartBiz Advisor™, an online educational tool to learn about how you can get your business SBA or bank loan ready before you apply – no cost involved. You can assess key criteria banks consider and where your business stands on each. Learn more about SmartBiz Advisor here.

* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.