What should a line of credit be used for?
A line is built for needs that come and go: carrying receivables while customers pay on 30- to 60-day terms, buying inventory ahead of a busy season, covering payroll timing, or keeping a cushion for surprises. Money drawn should come back as the cycle completes, so the line is available again next time.
For example, a wholesale distributor may draw in the spring to stock up, then bring the balance down as summer invoices are collected. A consulting firm may draw to meet payroll while a large client's invoice works through approval. When the money is funding something permanent, like a new machine, a term loan or equipment financing usually keeps the line free for what it does best.
How is a credit line limit set?
Many funders size a limit from annual revenue, the cash flow left after existing debt payments, and, for secured lines, a borrowing base of eligible receivables or inventory. Clean financials, low leverage and a history of paying draws back down are what typically support a larger limit or an increase at renewal.
- Cash flow: can the business carry interest on a fully drawn line plus its other obligations?
- Leverage: how much debt the balance sheet already carries.
- Usage history: a line that goes up and down reads very differently from one that sits fully drawn all year.
- Owner credit: affects eligibility, pricing and guarantee terms.
Secured or unsecured line: which fits?
An unsecured line relies on cash flow and credit, which means lighter paperwork but usually a smaller limit and higher cost. A secured line takes a lien on receivables, inventory or other assets and can support a larger limit. Secured lines often come with a borrowing base report the company updates on a regular schedule.
If your company has meaningful receivables or inventory and wants more room, a secured line is often worth comparing. If your assets are light, as in many professional or IT services firms, an unsecured line sized from recurring revenue may be the better match. Either way, read the lien language with your attorney.
What happens at renewal and during a clean-up period?
Many lines are reviewed annually. The funder re-reads your latest statements and returns, checks covenants and looks at how the line was used, then renews, resizes or declines to renew. Some lines also require a clean-up period, when the balance must drop to zero or a low level for a set stretch each year.
A clean-up requirement exists to show the line is covering short-term needs. If your balance never comes down, part of the need is probably permanent and belongs on a term loan. Our guide to line of credit renewal explains how to prepare months ahead.
When is a line of credit the wrong tool?
A line is a poor fit when it stays fully drawn for long stretches, when it funds long-lived assets, or when a business has no clear source for bringing the balance back down. A maxed-out line removes your cushion and can make renewal harder, even if every interest payment was on time.
It also helps to keep a second funding relationship. If your bank has already reduced your line or frozen draws, start comparing replacement options while you still have time to plan.
Frequently asked questions
Do I pay anything if I don't draw on the line?
Interest is usually charged only on the balance you draw. Some lines also carry an annual fee, an unused-line fee or a draw fee, and the mix varies by funder. Ask for the complete fee schedule in writing so you can compare the true cost of keeping the line open.
What is the difference between a revolving and a non-revolving line?
A revolving line lets you borrow again as you repay, up to the limit, for the life of the facility. A non-revolving line lets you draw up to the limit, but repaid amounts do not become available again. Established companies with recurring cash swings usually want revolving availability.
Can a new line replace one my bank reduced?
Often, yes. Established companies with strong credit and current financials frequently qualify for a replacement line elsewhere, though the new limit depends on that funder's own review. Start early, share the bank's notice and your latest statements, and consider pairing a smaller line with a term loan.
Is there a minimum line size?
Requirements vary by product and funder. Many look at time in business, monthly revenue and credit, and they size the limit from cash flow and any assets that secure the line. Share the amount you believe you need and how you plan to use it, and we will compare what partners can offer.
Does using most of my line hurt my chances of an increase?
It can. Funders like to see a line that is drawn and paid back down as the business cycle completes. A balance that sits near the limit for months may suggest a permanent need, which can lead to a smaller renewal or a request to move part of the balance onto a term schedule.
Line up a credit line that fits your cycle
Tell us how your cash moves through the year, and we will compare line structures from our funding partners.
Updated September 14, 2026 · 1Prime Capital Funding Team