Business lines of credit

How it works

A revolving line gives a business access to a limit. The business draws, repays, and may draw again under the agreement. Interest is generally charged on the drawn balance, while commitment, annual, administration, or draw fees may also apply. Availability can depend on financial reporting or eligible collateral.

Where it can fit

This structure is useful for recurring working-capital cycles: inventory arrives before sales, payroll falls before customer collections, or a seasonal business has uneven deposits. Model how the line pays down during the normal operating cycle.

Look closely at the trade-offs

A line that stays fully drawn may be funding a permanent need rather than a temporary gap. Ask whether the lender can reduce the limit, require a clean-down period, demand repayment, or reassess availability. Access today is not an unconditional promise of future advances.

Track what is available, not just the headline limit

A $100,000 limit and a $100,000 bank balance are different things. Suppose a fictional line has $35,000 already drawn, no pending transactions and no other availability restrictions. It leaves $65,000 undrawn. A further $25,000 draw increases the balance to $60,000 and reduces that room to $40,000. Repaying $20,000 restores the undrawn room to $60,000 if the same terms remain in place.

That last condition matters. Collateral tests, reporting requirements and contractual restrictions can reduce the amount a business may actually draw. Keep an approved limit, outstanding balance and confirmed available amount as separate forecast lines.

Source: BDC: lines of credit

Calculate interest using the balance and the clock

Consider a separate fictional 30-day period at an assumed 12% annual rate, using a 365-day denominator. The balance is $20,000 for the first 15 days and $50,000 for the next 15. Simple interest is $20,000 × 12% × 15 ÷ 365 plus $50,000 × 12% × 15 ÷ 365, or about $345.21 before fees.

Charging 12% of the full credit limit would answer a different question. So would multiplying the final balance by a whole month. The point of the example is to account for when each balance was outstanding. Actual agreements define accrual, billing, rate changes and payment allocation. The linked U.S. provider agreement is an example of why those details need to be read, not a statement that every facility uses its method.

Source: Wells Fargo: BusinessLine customer agreement

Give every draw a realistic repayment event

For a seasonal stock purchase, write down when stock is paid for, when it is expected to sell and when customers are expected to pay. If a $30,000 draw funds that stock, identify the cash expected to repay the $30,000 as well as the interest. Sales booked in the accounts are not necessarily cash available in the bank.

Now delay those collections by a month and include payroll and taxes during the delay. This reveals whether the line can still support the operating cycle. If the balance never falls, separate the recurring cash gap from a longer-lasting funding need before increasing the limit.

Know what could interrupt access

A renewal date, a demand provision, a reporting condition or a required temporary pay-down can matter as much as the interest rate. BDC’s discussion of Canadian operating lines highlights the possibility of collateral-based availability. Read the proposed agreement for the exact conditions that apply to your business.

Ask for a simple list of deadlines and restrictions, with the person responsible for each. Forecasting an unused line as an emergency reserve is only useful if the business understands when it could become unavailable. Requirements differ between providers and between Canada and the United States.

Source: BDC: lines of credit

Ask your broker

• What can reduce availability even if the headline limit is unchanged?
• When must the balance be repaid or the facility renewed?
• What fees remain when the drawn balance is zero?

Your next-step checklist

• Monthly cash-flow cycle
• Peak funding gap
• Expected repayment source
• Renewal, reporting, and draw conditions