What Is a Commercial Line of Credit? A Guide for Business Owners

What Is a Commercial Line of Credit?

A commercial line of credit (LOC) is a revolving loan that lets you borrow up to a set limit, repay what you’ve used, and borrow again. It’s similar to how a credit card works, but typically with lower interest rates and higher limits.

Unlike a lump-sum business loan, which gives you all the funds upfront, a line of credit provides ongoing access to funds, so you can draw from it as needed for short-term expenses or working capital.

Key Benefits of a Commercial Line of Credit

A commercial LOC offers flexibility that many traditional loans don’t. Here are some of the biggest advantages:

• Pay interest only on what you use – No need to pay interest on the full approved amount if you’re not using it.
• Reusable access to funds – Once you repay what you’ve borrowed, those funds become available again.
• Keeps cash flow steady – Helps cover payroll, inventory, or bills during slower seasons.
• Quick access to capital – You don’t have to reapply for a new loan every time you need short-term funds.
• Builds business credit – Responsible borrowing and repayment can improve your company’s credit profile.
  

Related: Banking Solutions for Small Business Success: How to Make Your Money Work for You

When to Use a Line of Credit (and When Not To)

A commercial line of credit is best suited for short-term needs and working capital, not for long-term, large-scale investments.

Great uses for a LOC:

• Covering temporary cash flow gaps
• Buying inventory or supplies
• Managing seasonal fluctuations in income
• Paying for unexpected repairs
• Taking advantage of limited-time opportunities

When a LOC might not be the best fit:

• Large, long-term purchases like real estate or major equipment
• Consolidating debt
• Expenses you can’t realistically pay off in the short term

For those situations, a term loan, SBA loan, or other business financing option might be a better fit.

Check Out All Business Financing Options

Commercial Line of Credit vs. Other Business Financing Options

Not sure how a line of credit stacks up against other options? Here’s a quick comparison:

Financing Type	Best For	How It Works	Typical Term/Notes	More Information
Line of Credit (LOC)	Short-term cash flow, inventory, operating costs	Revolving; draw and repay as needed	Interest on balance; annual renewals common	Learn More
Term Loan	Equipment, vehicles, expansions	Lump sum; fixed schedule	Fixed rate/term; predictable payments	Learn More
SBA Loan	Expansion, working capital, acquisitions	Government-guaranteed term loans	Longer terms; competitive rates	Learn More
Business Credit Card	Small, frequent purchases	Revolving; rewards possible	Higher rates; good for convenience	Learn More

 

Rule of thumb: Match the financing term to the life of the purchase. Short-term needs → LOC. Long-term assets → Term/SBA.

Who a Commercial Line of Credit Is Best For

• Retailers/wholesalers managing seasonal stock
• Contractors and trades with project-based cash flow
• Professional services firms bridging invoice timing
• Food/beverage and agribusinesses facing supply spikes
• Growing businesses needing flexibility  without over-borrowing
  

Ready to Apply for a Commercial Line of Credit? Contact Us

What You’ll Need to Apply (and How to Strengthen Your Request)

Every application is unique, but you’ll likely need:

• Business financial statements: Profit and loss, balance sheet, cash-flow statement
• Business tax returns: Typically 1–2 years
• Bank statements and AR/AP aging reports
• Ownership information and personal guarantees (common for small businesses)
• Business plan or summary (helpful if you’re newer or expanding)
  

Ways to strengthen your application:

• Show consistent cash flow and timely receivables
• Demonstrate responsible existing debt management
• Maintain a separate business bank account for clean records
• Be ready to explain how you’ll use and repay LOC funds
  

A long-standing relationship with a local bank like AbbyBank helps us understand your business cycle and tailor the right limit and structure.

Apply for a Commercial Line of Credit Today

Rates, Fees, and Terms to Understand

Here are a few things to know before you apply:

• Interest rate: Often variable; you pay interest only on what you draw.
• Draw period and renewal: Many LOCs renew annually and may require periodic reviews.
• Fees: May include annual,renewal, or non-use fees (depends on structure).
• Collateral: Some LOCs are secured by assets like inventory or receivables and others are unsecured.
• Covenants: Financial conditions you agree to maintain (e.g., minimum liquidity).
  

We’ll walk you through these details so there are no surprises.

Ready? Contact Our Business Banking Team

Common Mistakes to Avoid

There are a few common mistakes business owners make with their commercial line of credit, such as:

• Using an LOC for long-term purchases. Consider a term loan instead.
• Treating it like “extra income” Instead of planned funds. Have a plan for every draw.
• Carrying a constant maxed-out balance. Revolve responsibly to avoid strain.
• Waiting until a crisis to apply. Setting up a line before you need it is easier and less stressful.
• Mixing personal and business expenses. Keep accounts separate for clean records and credibility.

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Real-Life Uses (Quick Scenarios)

Let’s take a look at some examples of how commercial lines of credit could be used:

• Inventory buy-ahead: A retailer uses an LOC to purchase spring inventory at a discount in January, then repays the line as inventory sells.
• Project bridge: A contractor draws on the LOC to cover materials and payroll while waiting for a progress payment, then pays down the balance upon receipt.
• Unexpected repair: A restaurant’s walk-in cooler fails. The LOC covers the repair immediately, preventing revenue loss and product waste.
• Seasonal staffing: A landscaping company uses the LOC to staff up early for peak season, then pays it down as invoices are collected.