# Business line of credit: what it costs and when it fits

**Short answer:** A business line of credit lets you borrow up to a limit, repay, and borrow again, paying interest only on the balance you owe. It fits uneven cash flow, not permanent funding. An SBA Express line can reach $500,000 (SOP 50 10 8.1, Sec. B, Ch. 2, Para. B.1).

Canonical page: https://www.sbaexpress.loans/guides/business-line-of-credit/
Last checked: 2026-11-09

## On this page

- [How a line of credit works](#how-a-line-of-credit-works)
- [What a line costs: a worked example](#what-a-line-costs-a-worked-example)
- [When a line fits](#when-a-line-fits)
- [When a line is a bad idea](#when-a-line-is-a-bad-idea)
- [Line or term loan](#line-or-term-loan)
- [SBA options for a line](#sba-options-for-a-line)
- [Questions to ask before you sign](#questions-to-ask-before-you-sign)

## How a line of credit works

A business line of credit is a revolving limit. You draw what you need, repay it, and draw again. Interest runs only on the balance you owe. SBA describes this as paying interest only for the time the funds are in use (89 FR 57353).

The lender sets the limit, the rate, any fees and a maturity. The OCC's handbook on receivables and inventory financing says a revolver normally supplies working capital. Cash from inventory and receivables repays it (p. 7).

The Federal Reserve Banks' 2026 small business credit report draws on 6,525 employer firms. Among applicants for a loan, line or merchant cash advance, 43% sought a business line of credit. No other product drew more. The survey is a convenience sample, so read the figure as a pattern, not a national count.

## What a line costs: a worked example

Suppose a bank gives you a $50,000 line. Assume 12% a year on the amount drawn and a $500 annual fee, which is 1% of the limit. This is an illustration, not a quote.

**A short draw.** You draw $20,000 for three months while customers pay late.

- Interest: $20,000 × 12% × 3/12 = $600.
- Add the fee: $600 + $500 = $1,100.
- You held $20,000 for a quarter of a year, the same as $5,000 for a full year.
- Cost of the money you used: $1,100 ÷ $5,000 = 22%.

**A permanent draw.** You keep $40,000 drawn all year.

- Interest: $40,000 × 12% = $4,800.
- Add the fee: $4,800 + $500 = $5,300.
- Cost of the money you used: $5,300 ÷ $40,000 = 13.25%.

A fixed fee raises your real cost most when you borrow little. Ask for every fee in writing, including annual, draw, unused-line and renewal fees. Then run this arithmetic with your own numbers.

## When a line fits

A line fits money that comes back from sales on a schedule you can name.

- **A slow-paying customer.** You make payroll on Friday and the invoice pays in 45 days. The draw bridges the gap, and the customer's check repays it.
- **A seasonal build.** You buy inventory ahead of the busy months and repay it from sales.
- **A cushion.** You keep a limit open for surprises and draw only if one hits.

Use one test. Name the sale or payment that will repay each draw, and the month it should arrive. If you cannot name it, the line is covering something else.

## When a line is a bad idea

- **Long-lived purchases.** Equipment, a building or a buyout will outlast any draw. A Working Capital CAPLine is for short-term needs. If proceeds buy fixed assets, SBA requires the lender to move that part into a term facility (SOP 50 10 8.1, Sec. B, Ch. 4, Para. A.1). Start with a term loan instead.
- **Covering losses.** If the business loses money each month, a draw delays the problem and adds interest. A losing business has no spare cash to pay the balance down.
- **A balance that never reaches zero.** Receivables lenders often add a clean-up requirement. You repay the revolver to zero, typically for at least 30 consecutive days a year (OCC handbook, p. 9). In receivables lending, revolver maturities usually run one to three years, and a demand feature gives the lender considerable control (p. 8).
- **A variable rate you cannot absorb.** Variable-rate payments change when rates change (SBA, 7(a) loans). On a $40,000 balance, 2 percentage points adds $40,000 × 2% = $800 a year, or about $67 a month.
- **A guarantee you have not weighed.** Of firms with debt in the Fed survey, 59% secured it with a personal guarantee.

## Line or term loan

Choose by how long the need lasts. A need that comes and goes within a year points to a line. A single purchase that pays back over several years points to a term loan, which spreads the cost over a fixed schedule.

Many owners hold both: a term loan for assets and a smaller line for timing gaps. Keep the two separate, so that a draw never quietly funds a long-term purchase.

## SBA options for a line

Only a few SBA programs can revolve. They are SBA Express, CAPLines, MARC, Export Express and the Export Working Capital Program. The 7(a) Working Capital Pilot also revolves (SOP 50 10 8.1, Sec. A, Ch. 3, Para. B.4; 89 FR 57353). The two most useful are these.

- **SBA Express line.** Up to $500,000, with a 50% SBA guaranty. The line can run 10 years, including any term-out period, with no advances after the first 60 months (App. 17, Para. B.3). On SBA Express, the lender makes the credit decision without prior SBA review.
- **Working Capital CAPLine.** Up to $5,000,000, secured by receivables and inventory and usually run on a borrowing base (Sec. B, Ch. 4, Para. F).

Collateral is not required at $50,000 or less on SBA Express. Above that, the lender may use its own collateral policies for similar non-SBA loans (App. 19, Para. B.3). SBA caps the variable rate at Prime plus 3.0 to 6.5 percentage points, depending on loan size (13 CFR 120.214(d)).

Each owner of 20% or more of the business gives an unlimited personal guaranty (Sec. A, Ch. 5, Para. A.1). A 7(a) lender may not charge commitment, origination, broker, referral and similar fees, points, prepayment fees and renewal fees (Sec. A, Ch. 4, Para. C.4). A line of 12 months or less pays an upfront fee of 0.25% of the guaranteed portion (Information Notice 5000-881797, pp. 1-3). The fee is 0% for loans of $700,000 or less to manufacturers (NAICS 31-33), listed food supply chain businesses and businesses in rural areas. SBA Express loans to veteran-owned businesses pay $0.

## Questions to ask before you sign

- Is the limit committed, or can the lender reduce it?
- What is the rate formula, and how often does it reset?
- Which fees apply: annual, draw, unused-line or renewal?
- Is there a clean-up period or a minimum balance?
- What do I pledge, and do I guarantee the line personally?
- What happens at maturity: renewal, term-out or payoff?

## Sources

- [Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey (published March 2026)](https://www.fedsmallbusiness.org/2026-report-on-employer-firms)
- [OCC Comptroller's Handbook, Accounts Receivable and Inventory Financing (March 2000, updated March 20, 2025)](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/accts-rec-inventory-financing/pub-ch-accts-rec-inventory-financing.pdf)
- [89 FR 57353 (July 15, 2024), 7(a) Working Capital Pilot, Federal Register](https://www.govinfo.gov/content/pkg/FR-2024-07-15/pdf/2024-15313.pdf)
- [SBA, 7(a) loans (sba.gov, read November 9, 2026)](https://www.sba.gov/funding-programs/loans/7a-loans)
- [SOP 50 10 8.1, Sec. B, Ch. 2, Para. B.1 (p. 126)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, App. 16, Para. B.2 (Para. B begins p. 388)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, App. 17, Para. B.3 (Para. B begins p. 391)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, Sec. B, Ch. 2, Para. C.2 (Para. C begins p. 127)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, Sec. B, Ch. 4, Para. B.1 (Para. B begins p. 147)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, App. 19, Para. B.3 (Para. B begins p. 408)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [13 CFR § 120.214(d)](https://www.ecfr.gov/current/title-13/section-120.214)
- [SOP 50 10 8.1, Sec. A, Ch. 5, Para. A.1 (p. 93); 13 CFR § 120.160(a)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, Sec. A, Ch. 4, Para. C.4 (Para. C begins p. 62)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SBA Information Notice 5000-881797, pp. 1-3](https://legacy.sba.gov/document/information-notice-5000-881797-fy-2027-7a-program-fees)
- [SOP 50 10 8.1, Sec. B, Ch. 4, Para. A.1, Working Capital CAPLines (p. 144)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, Sec. A, Ch. 3, Para. B.4, Restrictions on Uses of Proceeds (p. 53)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)