What is Line of credit? Definition, Formula & Benchmarks

What is line of credit?

A line of credit is a flexible loan you can draw from up to a set limit, repay, and draw again as needed. You pay interest only on what you actually borrow, not the full limit. It's a cash-flow cushion for covering short-term gaps, like slow-paying customers or seasonal swings, rather than long-term funding.

Why it matters for fast-growing companies

A line of credit smooths timing gaps, letting you cover payroll or expenses while waiting on receivables without raising equity or a term loan. The catch is it's revolving debt: interest, fees, and the temptation to lean on it for structural losses. Use it for timing, not to paper over a business that spends more than it earns.

Frequently asked questions

How is a line of credit different from a term loan?+

A term loan gives you a lump sum upfront that you repay on a fixed schedule. A line of credit is revolving: you draw what you need up to a limit, pay interest only on the drawn amount, repay, and reuse it. Lines suit fluctuating short-term needs; term loans suit one-time, planned investments.

When should a startup use a line of credit?+

It's best for bridging predictable timing gaps, such as covering expenses while large invoices are still in collection, or smoothing seasonal revenue. It's a poor fit for funding ongoing losses, because revolving interest and the standing balance can quietly become a permanent, expensive liability rather than a temporary bridge.

Line of credit