Cash flow ups and downs can hinder your company’s success, growth and longevity. Many small business owners turn to lines of credit to manage the unpredictability. According to the Federal Reserve’s 2024 Small Business Credit Survey, 40 percent of small businesses applied for a line of credit for funding, compared to 33 percent who pursued a business loan.

A business line of credit offers flexible access to funds, allowing you to borrow as needed, pay interest only on what you use, and reuse it as you repay. But high fees and short repayment terms mean it’s not the right financing option for everyone.

Consider the line of credit pros and cons to help you determine if a business line of credit is a good idea for your funding needs.

Business lines of credit come with many key advantages that make them worth considering.

Past-due invoices and seasonal downturns often lead to cash flow issues in businesses. If you’re experiencing either or are dealing with an unexpected expense, it can be challenging to pay bills, take care of your employees and make investments in your business.

A business line of credit helps improve cash flow by giving you a pool of funds to pull from whenever you face these situations. So you won’t have to pause operations or shut your doors for good.

If you were denied a bank loan, it’s likely due to your credit rating, time in business or annual income. However, you could have better luck with a business line of credit, even if you’re a startup or have bad credit, as some lenders have more lenient eligibility requirements.

For example, Fundbox’s line of credit accepts businesses with just three months in business and annual revenue of $30,000, some of the lowest requirements on the market.

Interest rates on business lines of credit tend to be low compared to other types of business loans or business credit cards. You’ll generally qualify for competitive terms on a business line of credit if you meet the lender’s eligibility criteria and have a solid credit rating. But online lenders tend to charge higher rates compared to lines of credit from traditional banks and credit unions.

On average, business lines of credit have APRs ranging from 8 percent to 60 percent or higher. Based on data from the Q1 2025 Small Business Lending Survey, the average rates for new lines of credit were 7.25 percent to 8.17 percent, depending on whether it was a variable- or fixed-rate line of credit at a rural or urban bank. By comparison, the average rates for new term loans ranged from 7.33 percent to 7.99 percent.

A business line of credit can help you build a strong relationship with your lender. By managing the credit responsibly, you show that you’re a reliable borrower, which can lead to a higher credit limit, easier renewal or better terms in the future. Opening a business checking account with the same lender can further strengthen the relationship by giving them insight into your cash flow and earning trust.

The lender may also be more lenient the next time you apply for business funding. Or you may qualify for better terms and lower interest rates since you’re already doing business with the lender.

If the lender reports account activity to the business credit bureaus, you could build business credit with a business line. As your business credit score improves, you could access more funding opportunities and better financing terms.

You can choose the right type of lines of credit for your needs. Evaluating each type, considering what you need the line for, and your business’s credit profile and repayment ability before applying can help ensure you get the right line of credit for your business.

Despite their flexibility, business lines of credit also come with their fair share of drawbacks.

Business lines of credit may come with a number of loan fees to watch out for. These fees may drive up the overall cost of a business line of credit:

For many business lines of credit, you can only pull funds from a business line of credit during the draw period. Once it ends, the amount you owe is converted to a loan and payable over a set period. The loan term may be brief, depending on the lender, essentially turning your line of credit into a short-term loan. Online lenders often have the shortest repayment periods, anywhere from 6 months to 24 months.

Because you can draw from the line up to your available credit as needed, you can easily get into a cycle of debt if you withdraw multiple times without repaying past loans in a timely manner. You’ll need to manage the debt effectively to stay on top of repayments.

To avoid getting into a cycle of debt, estimate the monthly repayments using a business loan calculator before you make a withdrawal. Then, plug the amount into your business budget and prioritize payments when paying for expenses. Be careful not to make too many withdrawals without a plan for repaying the loans.

A business line of credit can improve your cash flow, may be more accessible than other funding options and can help you establish a relationship with your lender. But it may come with fees and typically has short repayment terms of two years or less. You should also make sure you can pay off prior draws before making an additional draw to avoid getting into a debt cycle that could spiral out of control and risk your business or personal assets.

A business line of credit may be the right choice for you if you fall into one or more of these situations:

Understanding the business line of credit pros and cons is key to deciding whether this financing option fits your business. The best lines of credit can help you build business credit, reinforce your lender relationship and offer better financing terms than other funding alternatives. But fast repayment terms, fees and the potential for debt accumulation could derail your business finances if not properly managed.

Alternatives like term loans, merchant cash advances, or invoice financing may be a better fit depending on your business’s financial health and goals.