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Setting an Asking PriceUsing a Business BrokerSelling a Business During DivorceSelling a Failing BusinessTransferring Intellectual PropertyPreparing an Online Business for SalePreparing for Sale, Two Years OutSelling a Business QuicklyWriting a Selling MemorandumSelling a Business Step by StepSelling a Business With DebtChanges Worth Making Before SellingEverything you need to understand how banks size and approve business lines of credit -- what the qualifier calculates, how to interpret your eligibility, and how a LOC fits into your capital stack alongside term loans and SBA financing.
A business line of credit (LOC) is a revolving credit facility -- a pre-approved borrowing limit from which you can draw funds as needed, repay them, and draw again. Unlike a term loan, you only pay interest on the amount actually drawn at any given time.
The bank sets a credit limit -- the maximum you can have outstanding at one time. Within that limit, you control the timing and size of draws. Many LOCs require a "clean-up period" -- typically 30-60 consecutive days per year when the balance must be paid to zero -- to demonstrate the facility is being used for short-term working capital rather than permanent financing.
Business LOCs are the most common short-term financing tool for operating businesses. Unlike SBA loans, they are designed for cyclical, seasonal, or unpredictable cash flow needs -- not long-term asset purchases. The bank expects you to draw for a specific purpose (funding a contract, covering payroll during a slow month, buying inventory for a season), get paid, and pay down the line.
Revolving vs. non-revolving
Most business LOCs are revolving: principal repaid becomes available to draw again. Some structured credit lines (particularly asset-based facilities) are non-revolving -- each draw reduces the available commitment permanently. Our calculator models revolving credit lines.
| Type | Collateral | Typical limit | Best for | Who qualifies |
|---|---|---|---|---|
| Unsecured business LOC | None (personal guarantee only) | $25K -- $250K | General working capital, established businesses with strong credit | 700+ credit, 2+ yrs, profitable |
| Secured business LOC | Blanket lien on all assets | $100K -- $1M+ | Larger working capital needs; businesses with assets to pledge | 680+ credit, 2+ yrs, positive cash flow |
| AR-based LOC | Accounts receivable (70-85% advance rate) | $100K -- $5M+ | B2B businesses with consistent AR; government contractors | Quality AR, any credit (AR is the collateral) |
| Inventory LOC | Inventory (40-60% advance rate) | $100K -- $2M+ | Distributors, retailers, manufacturers with predictable inventory turns | Good inventory management, 2+ yrs |
| SBA CAPLine | AR or contract proceeds | Up to $5M | Seasonal businesses, contractors with government/commercial contracts | SBA-eligible, working capital purpose |
| HELOC (business use) | Owner's real estate | 80% of home equity | Sole proprietors/small businesses without business credit | Home equity, owner credit score |
Our Business LOC Qualifier calculates three things: how much line you likely qualify for, what it will cost to carry a given draw, and whether an LOC or an SBA term loan is the better structure for your need.
Revenue-based sizing (unsecured / blanket lien)
Max LOC = Annual revenue × 8% -- 15%
Banks typically approve unsecured or blanket-lien LOCs at 8-15% of annual revenue for established profitable businesses. The percentage depends on credit quality, years in business, and industry. A $2M revenue business might qualify for $160K-$300K.
AR-based sizing
Max LOC = Eligible AR × Advance rate (70-85%)
Eligible AR = current, collectible receivables under 90 days from creditworthy debtors. Government AR, concentrated AR (>20% from one customer), and disputed AR may be excluded. A business with $500K of eligible AR at an 80% advance rate qualifies for a $400K AR-based line.
Interest cost on a draw
Monthly interest = Draw amount × (Annual rate / 12)
LOC interest is typically calculated on the daily average outstanding balance. You only pay interest on what you've drawn. Example: $100K drawn at 9.5% = $791.67/month in interest. No principal payment required until line renewal or payoff.
DSCR check (annual)
DSCR = EBITDA / (All existing annual debt service + LOC interest at full draw)
Banks assess whether the LOC interest cost -- assuming fully drawn -- still leaves adequate DSCR on your total debt load. Typically 1.20x minimum for an LOC vs. 1.25x for a term loan, since LOCs are expected to fluctuate.
| Field | What it measures | Where to find it | Impact on result |
|---|---|---|---|
| Annual revenue | Total business revenue for the trailing 12 months. The primary driver of revenue-based LOC sizing. | Income statement, tax return Line 1 (Gross receipts) | Primary sizing driver for unsecured/blanket-lien LOCs. More revenue = larger available line. |
| Accounts receivable (AR) | Current outstanding receivables owed to your business by customers. Used for AR-based sizing. | Balance sheet, A/R aging report | Primary sizing driver for AR-based LOCs. Directly multiplied by the advance rate. |
| AR aging (<90 days %) | What percentage of your AR is current (under 90 days old). Overdue AR is typically excluded from the borrowing base. | A/R aging report from your accounting system | Reduces effective AR. AR older than 90 days is typically ineligible collateral. |
| Advance rate | The percentage of eligible AR the bank will lend against. Typically 70-85% depending on AR quality, concentration, and debtor creditworthiness. | Negotiated with lender; defaulted to 80% in calculator | Multiplies eligible AR to determine the credit limit on an AR-based line. |
| Annual EBITDA | Cash flow available to service debt. Used in the DSCR check alongside existing obligations. | P&L, tax returns (add back D&A, owner adjustments) | Determines whether you can service the LOC interest plus all existing debt. |
| Existing monthly debt service | All current monthly loan and lease payments across all business obligations. | Debt schedule, bank statements | Reduces available DSCR capacity. Higher existing debt = smaller LOC approval. |
| Credit score | Owner's personal FICO score. Even for business LOCs, the personal guarantee and personal credit drive lender risk assessment. | Credit monitoring service, bank report | Determines which LOC types are accessible and the interest rate spread offered. |
| Years in business | Operating history. Banks want to see consistent revenue and a track record of managing cash flow. | Business formation date, tax filings | Under 2 years typically limits to secured or alternative lender LOCs at higher rates. |
| LOC purpose | What you intend to use the line for. Drives the comparison between LOC structure and term loan alternatives. | Your working capital needs analysis | Used in use-case scoring and LOC-vs-term-loan comparison. |
Revenue-based limit
10-15% of revenue
Conservative estimate for an established business with good credit. Actual approval may be higher depending on lender and specific financial profile.
AR-based limit
Eligible AR × advance rate
Driven by your borrowing base: current AR under 90 days, multiplied by the advance rate (typically 80%). This is the most accurate sizing method for B2B businesses.
Monthly interest cost
Draw × rate / 12
Interest-only on the drawn amount. No principal payment required on most revolving LOCs. The calculator shows cost at 25%, 50%, 75%, and 100% utilization.
DSCR with full LOC draw
Min 1.20x
Banks test DSCR assuming the LOC is fully drawn. Green = 1.25x or above. Amber = 1.20-1.25x (marginal). Red = below 1.20x (likely reduced approval or decline).
| Requirement | Bank LOC standard | Alternative lender | SBA CAPLine |
|---|---|---|---|
| Credit Profile | |||
| Credit score | 680+ (700+ preferred) | 550+ (higher rate) | 680+ |
| Years in business | 2+ years | 6+ months | 2+ years |
| Personal guarantee | Required (20%+ owners) | Required | Required |
| Financial Profile | |||
| Revenue requirement | $250K+ annual | $100K+ annual | $250K+ annual |
| Profitable | Preferred (not always required) | Not required | Preferred |
| DSCR on full draw | 1.20x+ global | Often waived | 1.25x |
| Clean-up period | 30-60 days/year | Often waived | Not required |
| Collateral | |||
| Unsecured option | Yes (under $250K, strong credit) | Yes | No |
| Blanket lien | Common on larger lines | Common | On AR/contracts |
| AR as collateral | Eligible (AR-based line) | Eligible | Primary collateral |
Understanding how lenders arrive at your credit limit helps you structure your request correctly and anticipate what documentation supports the largest possible approval.
Determine the purpose and expected cycle
Banks ask: what is the LOC for, how long does each cycle last, and what repays the draw? Working capital LOCs should cycle through in 30-90 days. If your cycle is longer than 90 days, a term loan may be more appropriate and the bank will say so. The calculator flags this mismatch.
Assess revenue and cash flow
Revenue-based sizing: banks typically approve 8-15% of trailing 12-month revenue for established businesses (2+ years, profitable, 700+ credit). Higher credit quality and longer history push toward the top of the range. Newer businesses or marginal credit land at 5-8%.
If AR-based: build the borrowing base
The bank audits your AR: pulls the aging report, identifies eligible receivables (current, not concentrated, from creditworthy debtors), applies the advance rate (70-85%), and that product becomes your credit limit. They re-calculate this monthly on AR-based lines. Our calculator shows the math with your inputs.
Stress test DSCR at full draw
Banks calculate your DSCR assuming the LOC is 100% drawn all year: (EBITDA) / (existing annual debt service + LOC interest at full draw). This must exceed 1.20x. If it does not, the bank reduces the approved limit until the stressed DSCR passes. The calculator does this calculation and shows the maximum LOC size that keeps DSCR at 1.20x.
Set the limit and rate
The final credit limit is typically the lesser of: revenue-based limit, AR-based limit (if applicable), and DSCR-constrained maximum. The rate is Prime + a spread (1-5%) based on credit quality. LOCs also typically carry an annual fee (0.25-0.5% of the committed line) and an unused fee (0.1-0.25% on undrawn amounts).
| Fee | Typical rate | When charged | On what base |
|---|---|---|---|
| Interest | Prime + 1-5% | Monthly on drawn balance | Daily average outstanding balance |
| Annual / commitment fee | 0.25-0.50% | At origination and annual renewal | Total credit limit (committed amount) |
| Unused fee | 0.10-0.25% | Quarterly on undrawn amount | Uncommitted (undrawn) portion of the line |
| Origination / closing fee | 0.50-1.00% | At origination only | Total credit limit |
| Borrowing base audit | $500-$2,500 | Annually or at lender discretion | Flat fee (AR-based lines only) |
| Early termination | 1-3% of limit | If closed before renewal date | Outstanding or committed amount |
Calculate your all-in cost
A $500K LOC at 9.5% with a 0.25% annual fee and 0.15% unused fee costs: if you average 50% utilization ($250K drawn), your interest is $23,750/year. Annual fee: $1,250. Unused fee on $250K undrawn: $375. Total annual cost: ~$25,375 -- an effective rate of about 5.1% on the committed line, or 10.15% on the average balance. Our calculator shows this breakdown at your utilization level.
An AR-based line of credit is sized dynamically -- your credit limit rises and falls with your eligible receivables. Understanding the borrowing base formula is essential to maximizing an AR-based LOC.
Borrowing base formula
Total AR × Eligible % × Advance rate = Available credit
Eligible % = portion of AR that is current (<90 days), not concentrated (<20% from any single debtor), and from creditworthy debtors. Typical: 70-90% of total AR is eligible. Advance rate: 70-85% of eligible AR. A $600K AR pool that is 85% eligible at an 80% advance rate = $408K available line.
| AR exclusion type | Why excluded | Impact on borrowing base |
|---|---|---|
| AR over 90 days | Presumed uncollectible; lender won't advance against it | Fully excluded. Keep AR current to preserve borrowing base. |
| Concentrated AR (>20% from one debtor) | Concentration risk -- one bad debtor tanks the collateral | Amount over 20% threshold excluded. Diversify your customer base. |
| Cross-aged AR | If 50%+ of one debtor's AR is over 90 days, all of that debtor's AR is excluded | Can eliminate a large customer's AR entirely. Monitor closely. |
| Government AR | Slow pay, special assignment rules (Anti-Assignment Act) | Some banks exclude; others accept at reduced advance rate (60-70%) |
| Foreign AR | Collection difficulty in foreign jurisdictions | Usually excluded unless insured (EXIM Bank) |
| Work-in-progress (WIP) | Not yet billed; not a receivable yet | Excluded. Only billed, deliverable-complete AR counts. |
Monthly borrowing base certificates
AR-based lines require you to submit a borrowing base certificate (BBC) monthly -- a report of your current AR aging that the bank uses to calculate your available credit. If eligible AR declines, your available credit declines automatically. If you have already drawn more than the new limit allows, you must immediately pay down the excess (a "mandatory paydown"). Failure to submit BBCs is a technical default on most AR-based facilities.
Seasonal working capital
Retailers, landscapers, construction companies, and agricultural businesses with predictable seasonal revenue gaps. Draw in slow season, repay in peak. A LOC is purpose-built for this cycle.
Bridging contract receivables
You won a contract, have the work-in-progress costs, but won't be paid for 45-90 days. An AR-based LOC lets you draw against the receivable the day you invoice. Cash flow problem solved without a term loan.
Inventory purchasing
You need to buy inventory before the selling season begins. A LOC funds the purchase; sales revenue repays the draw. This is exactly the cycle a revolving LOC is designed for -- unlike an equipment loan, there is no fixed repayment schedule.
Payroll float and timing gaps
You have 120 employees due on Friday and $400K in receivables due next Tuesday. A LOC bridges the gap without factoring (which is expensive) or defaulting on payroll (which is catastrophic).
Rapid revenue growth
Your business is growing 40% YoY but the growth creates a cash gap: more customers, more inventory, more labor -- all before more cash. An AR-based LOC that grows with your receivables is the ideal growth-financing tool.
OpEx reserve / contingency
Having an undrawn LOC available creates optionality: it costs almost nothing (just the unused fee) but provides immediate liquidity for unexpected expenses, supplier discounts that require fast payment, or a one-time opportunity. Many owners keep an undrawn LOC as a form of insurance.
Business LOC
A business line of credit (LOC) is a revolving credit facility -- a pre-approved borrowing limit from which you can draw funds as needed, repay them, and draw again. Unlike a term loan, you only pay interest on the amount actually drawn at any given time.
The bank sets a credit limit -- the maximum you can have outstanding at one time. Within that limit, you control the timing and size of draws. Many LOCs require a "clean-up period" -- typically 30-60 consecutive days per year when the balance must be paid to zero -- to demonstrate the facility is being used for short-term working capital rather than permanent financing.
Business LOCs are the most common short-term financing tool for operating businesses. Unlike SBA loans, they are designed for cyclical, seasonal, or unpredictable cash flow needs -- not long-term asset purchases. The bank expects you to draw for a specific purpose (funding a contract, covering payroll during a slow month, buying inventory for a season), get paid, and pay down the line.
Revolving vs. non-revolving
Most business LOCs are revolving: principal repaid becomes available to draw again. Some structured credit lines (particularly asset-based facilities) are non-revolving -- each draw reduces the available commitment permanently. Our calculator models revolving credit lines.
| Type | Collateral | Typical limit | Best for | Who qualifies |
|---|---|---|---|---|
| Unsecured business LOC | None (personal guarantee only) | $25K -- $250K | General working capital, established businesses with strong credit | 700+ credit, 2+ yrs, profitable |
| Secured business LOC | Blanket lien on all assets | $100K -- $1M+ | Larger working capital needs; businesses with assets to pledge | 680+ credit, 2+ yrs, positive cash flow |
| AR-based LOC | Accounts receivable (70-85% advance rate) | $100K -- $5M+ | B2B businesses with consistent AR; government contractors | Quality AR, any credit (AR is the collateral) |
| Inventory LOC | Inventory (40-60% advance rate) | $100K -- $2M+ | Distributors, retailers, manufacturers with predictable inventory turns | Good inventory management, 2+ yrs |
| SBA CAPLine | AR or contract proceeds | Up to $5M | Seasonal businesses, contractors with government/commercial contracts | SBA-eligible, working capital purpose |
| HELOC (business use) | Owner's real estate | 80% of home equity | Sole proprietors/small businesses without business credit | Home equity, owner credit score |
Our Business LOC Qualifier calculates three things: how much line you likely qualify for, what it will cost to carry a given draw, and whether an LOC or an SBA term loan is the better structure for your need.
Revenue-based sizing (unsecured / blanket lien)
Max LOC = Annual revenue × 8% -- 15%
Banks typically approve unsecured or blanket-lien LOCs at 8-15% of annual revenue for established profitable businesses. The percentage depends on credit quality, years in business, and industry. A $2M revenue business might qualify for $160K-$300K.
AR-based sizing
Max LOC = Eligible AR × Advance rate (70-85%)
Eligible AR = current, collectible receivables under 90 days from creditworthy debtors. Government AR, concentrated AR (>20% from one customer), and disputed AR may be excluded. A business with $500K of eligible AR at an 80% advance rate qualifies for a $400K AR-based line.
Interest cost on a draw
Monthly interest = Draw amount × (Annual rate / 12)
LOC interest is typically calculated on the daily average outstanding balance. You only pay interest on what you've drawn. Example: $100K drawn at 9.5% = $791.67/month in interest. No principal payment required until line renewal or payoff.
DSCR check (annual)
DSCR = EBITDA / (All existing annual debt service + LOC interest at full draw)
Banks assess whether the LOC interest cost -- assuming fully drawn -- still leaves adequate DSCR on your total debt load. Typically 1.20x minimum for an LOC vs. 1.25x for a term loan, since LOCs are expected to fluctuate.
| Field | What it measures | Where to find it | Impact on result |
|---|---|---|---|
| Annual revenue | Total business revenue for the trailing 12 months. The primary driver of revenue-based LOC sizing. | Income statement, tax return Line 1 (Gross receipts) | Primary sizing driver for unsecured/blanket-lien LOCs. More revenue = larger available line. |
| Accounts receivable (AR) | Current outstanding receivables owed to your business by customers. Used for AR-based sizing. | Balance sheet, A/R aging report | Primary sizing driver for AR-based LOCs. Directly multiplied by the advance rate. |
| AR aging (<90 days %) | What percentage of your AR is current (under 90 days old). Overdue AR is typically excluded from the borrowing base. | A/R aging report from your accounting system | Reduces effective AR. AR older than 90 days is typically ineligible collateral. |
| Advance rate | The percentage of eligible AR the bank will lend against. Typically 70-85% depending on AR quality, concentration, and debtor creditworthiness. | Negotiated with lender; defaulted to 80% in calculator | Multiplies eligible AR to determine the credit limit on an AR-based line. |
| Annual EBITDA | Cash flow available to service debt. Used in the DSCR check alongside existing obligations. | P&L, tax returns (add back D&A, owner adjustments) | Determines whether you can service the LOC interest plus all existing debt. |
| Existing monthly debt service | All current monthly loan and lease payments across all business obligations. | Debt schedule, bank statements | Reduces available DSCR capacity. Higher existing debt = smaller LOC approval. |
| Credit score | Owner's personal FICO score. Even for business LOCs, the personal guarantee and personal credit drive lender risk assessment. | Credit monitoring service, bank report | Determines which LOC types are accessible and the interest rate spread offered. |
| Years in business | Operating history. Banks want to see consistent revenue and a track record of managing cash flow. | Business formation date, tax filings | Under 2 years typically limits to secured or alternative lender LOCs at higher rates. |
| LOC purpose | What you intend to use the line for. Drives the comparison between LOC structure and term loan alternatives. | Your working capital needs analysis | Used in use-case scoring and LOC-vs-term-loan comparison. |
Revenue-based limit
10-15% of revenue
Conservative estimate for an established business with good credit. Actual approval may be higher depending on lender and specific financial profile.
AR-based limit
Eligible AR × advance rate
Driven by your borrowing base: current AR under 90 days, multiplied by the advance rate (typically 80%). This is the most accurate sizing method for B2B businesses.
Monthly interest cost
Draw × rate / 12
Interest-only on the drawn amount. No principal payment required on most revolving LOCs. The calculator shows cost at 25%, 50%, 75%, and 100% utilization.
DSCR with full LOC draw
Min 1.20x
Banks test DSCR assuming the LOC is fully drawn. Green = 1.25x or above. Amber = 1.20-1.25x (marginal). Red = below 1.20x (likely reduced approval or decline).
| Requirement | Bank LOC standard | Alternative lender | SBA CAPLine |
|---|---|---|---|
| Credit Profile | |||
| Credit score | 680+ (700+ preferred) | 550+ (higher rate) | 680+ |
| Years in business | 2+ years | 6+ months | 2+ years |
| Personal guarantee | Required (20%+ owners) | Required | Required |
| Financial Profile | |||
| Revenue requirement | $250K+ annual | $100K+ annual | $250K+ annual |
| Profitable | Preferred (not always required) | Not required | Preferred |
| DSCR on full draw | 1.20x+ global | Often waived | 1.25x |
| Clean-up period | 30-60 days/year | Often waived | Not required |
| Collateral | |||
| Unsecured option | Yes (under $250K, strong credit) | Yes | No |
| Blanket lien | Common on larger lines | Common | On AR/contracts |
| AR as collateral | Eligible (AR-based line) | Eligible | Primary collateral |
Understanding how lenders arrive at your credit limit helps you structure your request correctly and anticipate what documentation supports the largest possible approval.
Determine the purpose and expected cycle
Banks ask: what is the LOC for, how long does each cycle last, and what repays the draw? Working capital LOCs should cycle through in 30-90 days. If your cycle is longer than 90 days, a term loan may be more appropriate and the bank will say so. The calculator flags this mismatch.
Assess revenue and cash flow
Revenue-based sizing: banks typically approve 8-15% of trailing 12-month revenue for established businesses (2+ years, profitable, 700+ credit). Higher credit quality and longer history push toward the top of the range. Newer businesses or marginal credit land at 5-8%.
If AR-based: build the borrowing base
The bank audits your AR: pulls the aging report, identifies eligible receivables (current, not concentrated, from creditworthy debtors), applies the advance rate (70-85%), and that product becomes your credit limit. They re-calculate this monthly on AR-based lines. Our calculator shows the math with your inputs.
Stress test DSCR at full draw
Banks calculate your DSCR assuming the LOC is 100% drawn all year: (EBITDA) / (existing annual debt service + LOC interest at full draw). This must exceed 1.20x. If it does not, the bank reduces the approved limit until the stressed DSCR passes. The calculator does this calculation and shows the maximum LOC size that keeps DSCR at 1.20x.
Set the limit and rate
The final credit limit is typically the lesser of: revenue-based limit, AR-based limit (if applicable), and DSCR-constrained maximum. The rate is Prime + a spread (1-5%) based on credit quality. LOCs also typically carry an annual fee (0.25-0.5% of the committed line) and an unused fee (0.1-0.25% on undrawn amounts).
| Fee | Typical rate | When charged | On what base |
|---|---|---|---|
| Interest | Prime + 1-5% | Monthly on drawn balance | Daily average outstanding balance |
| Annual / commitment fee | 0.25-0.50% | At origination and annual renewal | Total credit limit (committed amount) |
| Unused fee | 0.10-0.25% | Quarterly on undrawn amount | Uncommitted (undrawn) portion of the line |
| Origination / closing fee | 0.50-1.00% | At origination only | Total credit limit |
| Borrowing base audit | $500-$2,500 | Annually or at lender discretion | Flat fee (AR-based lines only) |
| Early termination | 1-3% of limit | If closed before renewal date | Outstanding or committed amount |
Calculate your all-in cost
A $500K LOC at 9.5% with a 0.25% annual fee and 0.15% unused fee costs: if you average 50% utilization ($250K drawn), your interest is $23,750/year. Annual fee: $1,250. Unused fee on $250K undrawn: $375. Total annual cost: ~$25,375 -- an effective rate of about 5.1% on the committed line, or 10.15% on the average balance. Our calculator shows this breakdown at your utilization level.
An AR-based line of credit is sized dynamically -- your credit limit rises and falls with your eligible receivables. Understanding the borrowing base formula is essential to maximizing an AR-based LOC.
Borrowing base formula
Total AR × Eligible % × Advance rate = Available credit
Eligible % = portion of AR that is current (<90 days), not concentrated (<20% from any single debtor), and from creditworthy debtors. Typical: 70-90% of total AR is eligible. Advance rate: 70-85% of eligible AR. A $600K AR pool that is 85% eligible at an 80% advance rate = $408K available line.
| AR exclusion type | Why excluded | Impact on borrowing base |
|---|---|---|
| AR over 90 days | Presumed uncollectible; lender won't advance against it | Fully excluded. Keep AR current to preserve borrowing base. |
| Concentrated AR (>20% from one debtor) | Concentration risk -- one bad debtor tanks the collateral | Amount over 20% threshold excluded. Diversify your customer base. |
| Cross-aged AR | If 50%+ of one debtor's AR is over 90 days, all of that debtor's AR is excluded | Can eliminate a large customer's AR entirely. Monitor closely. |
| Government AR | Slow pay, special assignment rules (Anti-Assignment Act) | Some banks exclude; others accept at reduced advance rate (60-70%) |
| Foreign AR | Collection difficulty in foreign jurisdictions | Usually excluded unless insured (EXIM Bank) |
| Work-in-progress (WIP) | Not yet billed; not a receivable yet | Excluded. Only billed, deliverable-complete AR counts. |
Monthly borrowing base certificates
AR-based lines require you to submit a borrowing base certificate (BBC) monthly -- a report of your current AR aging that the bank uses to calculate your available credit. If eligible AR declines, your available credit declines automatically. If you have already drawn more than the new limit allows, you must immediately pay down the excess (a "mandatory paydown"). Failure to submit BBCs is a technical default on most AR-based facilities.
Seasonal working capital
Retailers, landscapers, construction companies, and agricultural businesses with predictable seasonal revenue gaps. Draw in slow season, repay in peak. A LOC is purpose-built for this cycle.
Bridging contract receivables
You won a contract, have the work-in-progress costs, but won't be paid for 45-90 days. An AR-based LOC lets you draw against the receivable the day you invoice. Cash flow problem solved without a term loan.
Inventory purchasing
You need to buy inventory before the selling season begins. A LOC funds the purchase; sales revenue repays the draw. This is exactly the cycle a revolving LOC is designed for -- unlike an equipment loan, there is no fixed repayment schedule.
Payroll float and timing gaps
You have 120 employees due on Friday and $400K in receivables due next Tuesday. A LOC bridges the gap without factoring (which is expensive) or defaulting on payroll (which is catastrophic).
Rapid revenue growth
Your business is growing 40% YoY but the growth creates a cash gap: more customers, more inventory, more labor -- all before more cash. An AR-based LOC that grows with your receivables is the ideal growth-financing tool.
OpEx reserve / contingency
Having an undrawn LOC available creates optionality: it costs almost nothing (just the unused fee) but provides immediate liquidity for unexpected expenses, supplier discounts that require fast payment, or a one-time opportunity. Many owners keep an undrawn LOC as a form of insurance.
Business LOC
Term Loan
SBA CAPLine
The clean-up test: LOC vs permanent working capital
If your LOC never goes to zero -- if you are permanently drawn -- your bank will eventually reclassify the debt as a term loan need and require you to refinance it. A LOC is not for permanent working capital shortfalls. If you cannot cycle the line to zero for 30 days per year, you need a term loan, not a LOC. Our calculator flags this when your draw cycle exceeds 90 days.
Draw with a specific repayment source in mind
Every draw should have an identified repayment event: a specific invoice will be paid, a seasonal revenue surge is coming, a contract deliverable will be invoiced. Banks and your own discipline require this. Draws without repayment plans become permanent balances and trigger the clean-up failure.
Complete the annual clean-up period
Most bank LOCs require 30-60 consecutive days at zero balance per year. Calendar this in advance. If your business cycle makes clean-up impossible in a given year, talk to your banker before you miss the requirement -- not after. A proactive conversation may result in a waiver; a missed clean-up often triggers a renewal with tighter terms.
For AR-based lines: submit BBCs on time
Borrowing base certificates are typically due within 15-30 days of month end. Late submission is a technical default on most facilities. Set a calendar reminder and submit consistently, even when the certificate shows reduced availability.
Renew proactively -- don't wait for expiration
Most LOCs renew annually. Start the renewal conversation 90 days before expiration. Banks need updated financials, tax returns, and a financial review. If you wait until 30 days out, you may face a gap in availability if the bank needs more time or has questions about your financials.
Watch the financial covenant thresholds
Most bank LOCs include financial maintenance covenants: minimum DSCR (1.20-1.25x), maximum leverage ratio, or minimum current ratio. Test these quarterly against your actual financials. A covenant violation triggers a technical default and gives the bank the right to freeze draws or demand immediate repayment -- even if you have never missed a payment.
Does a business LOC affect my personal credit?
The application will typically trigger a hard inquiry on your personal credit report, which temporarily reduces your score. The LOC itself may or may not appear on your personal credit report depending on whether the lender reports business accounts to personal credit bureaus. Most traditional bank LOCs do not appear on personal credit, but SBA-backed facilities and some bank accounts do. The personal guarantee means a default will absolutely damage your personal credit -- the bank can pursue you personally for any outstanding balance.
What's the difference between a LOC and invoice factoring?
Invoice factoring involves selling your receivables to a factoring company at a discount (typically 85-95 cents on the dollar) for immediate cash. You give up the full receivable. A LOC secured by AR (AR-based line) borrows against the receivable but you retain ownership and collect it yourself. Factoring is faster to set up and accessible without strong credit, but costs more (effective annual rates of 15-50%+). An AR-based bank LOC costs 8-12% annually but requires a full bank underwriting process and good credit. Our calculator compares effective cost and recommends the right structure.
Can I use a business LOC to buy equipment or real estate?
Technically yes -- there is nothing stopping you from drawing on a LOC and buying equipment. But it is a poor structure: LOCs are designed for short-cycle needs, banks expect clean-up, and equipment has a useful life of 5-10+ years. A bank that discovers you used your working capital LOC to buy a $200,000 CNC machine will view this as a covenant violation (wrong use of proceeds) and may freeze the facility. Use an equipment loan or term loan for equipment, and keep your LOC for what it is designed for.
What happens if my LOC is called or not renewed?
A LOC can be called (demand clause) if you default on a covenant, miss payments, or if the bank determines the loan is no longer adequately secured. At call, you typically have 30-90 days to repay the full outstanding balance. If the LOC is simply not renewed at its annual maturity, you have until the maturity date to repay. This is why maintaining a LOC in good standing and renewing early is critical -- losing a LOC unexpectedly can create a serious liquidity crisis if you have draws outstanding. Keep a separate bank relationship or backup facility as contingency.
How is LOC interest calculated -- is it simple or compound?
Business LOC interest is typically calculated on the daily average outstanding balance (simple interest, not compounded). The bank calculates interest daily: outstanding balance × (annual rate / 365). This is summed for the month and charged to your account monthly. Because interest is on the drawn amount only, an unused LOC accrues no interest (only the unused fee, if any). Our calculator shows monthly interest at different utilization levels using the daily average method.
My business is seasonal -- should I get a LOC or an SBA CAPLine?
If your seasonal need is under $1M and you have good bank credit (680+ score, 2+ years, profitable), a standard bank LOC is simpler, faster (weeks vs. months), and less expensive in fees. If your need is above $1M, your credit is marginal, or you need the SBA guarantee to get the facility approved, the SBA CAPLine is the right product. The CAPLine's 10-year term also provides more stability than annual bank renewals for businesses with long seasonal capital needs. The trade-off is the SBA guarantee fee, longer underwriting, and more documentation.