How a line of credit works: borrow, repay, borrow again
The lender approves a limit. You draw what you need, pay it back, and the room opens up again. You pay interest only on the amount you have drawn, not the whole limit.
Online lines usually have lower limits and faster approval. Banks may offer higher limits and lower rates but want stronger credit and more years in business. The SBA's 7(a) Working Capital Pilot offers monitored lines up to $5 million.
Fees vary: some lenders charge an origination fee, a fee on each draw, or a monthly or yearly maintenance fee. Ask whether the rate is fixed or variable.
True cost: a $20,000 draw paid back over 12 months costs about $1,100 to $12,260 in interest
| APR | Monthly payment | Total interest |
|---|---|---|
| 10% | $1,758.32 | $1,099.81 |
| 99% | $2,688.38 | $12,260.54 |
Draw fees and maintenance fees add to this. If you only draw $5,000, you pay interest on $5,000. That is the main advantage over a lump-sum loan or advance you may not fully need.
Pros and cons: flexible and reusable, but fees and variable rates add up
Pros
- Interest only on what you use.
- Reusable as you pay it down.
- Good for uneven costs like payroll gaps and seasonal stock.
Cons
- Draw, origination and maintenance fees can raise the real cost.
- Rates may be variable.
- Some online lines require weekly payments; bank lines want stronger credit.
When a line of credit fits, and when it doesn't
It fits when
- Costs that come and go, like seasonal inventory or late-paying customers.
- A safety cushion you may not use every month.
Look elsewhere when
- A large one-time purchase; a term loan or equipment financing usually fits better.
- Covering a shortfall that happens every month; that is a cash flow problem to fix first.
Red flags: draw fees, surprise annual reviews, and quotes without an APR
Watch out
A fee on every draw. On small draws it can be a big share of the cost.
An annual review that can freeze or shrink the line. On SBA revolving lines, an unsatisfactory review converts the line into a term loan.
A quote with a monthly rate and no APR.
State rules: open-end credit is covered by some disclosure laws
Several states now require a written cost disclosure before a line of credit deal is signed, and some, like New York and California, require an estimated APR. New York covers deals up to $2.5 million, California up to $500,000, Virginia sales-based deals up to $500,000, and Vermont adds rules on July 1, 2027. Some of these states also regulate brokers like Batch Capital.
New Jersey has no commercial financing disclosure law yet. Bill S1760 was introduced on Jan 13, 2026 and sits in committee. See our state disclosure law lookup and the New Jersey MCA law guide.
This is general information, not legal advice, as of Oct 20, 2026.
Alternatives to a line of credit
- Invoice factoring: if the gap comes from unpaid invoices.
- Term loan: for a one-time cost.
- SBA loans: SBA Express and CAPLines include revolving lines.
- Merchant cash advance: faster to get, but far more expensive.