Line of credit is a flexible arrangement that allows a company to borrow and repay funds up to a predetermined credit limit, offering on-demand access to capital for various financial needs.
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Last Updated: January 23, 2026
Sometimes, a business owner needs a little extra capital to meet their goals. That’s when it makes sense to have a line of credit, a flexible loan obtained from a financial institution. A line of credit is a pool of money (a defined amount) that the business owner can borrow from, accessing funds as needed.
A line of credit is a loan that operates much like a credit card. The company has a certain amount of funds it can draw from, and it only uses that money as needed. The business pays interest only on the funds the company actually uses, not the total funds available.
The biggest line of credit advantage is the ability to borrow only the amount needed instead of the entire loan. This way, a business owner avoids paying interest on a large loan for sums that exceed their needs.
There are different types of lines of credit depending on a company’s needs. A business line of credit is generally obtained from a financial institution. This institution conducts a full evaluation to determine the amount the company should receive. This includes looking at market value, profitability, and risks.
If a business owner is looking to open a line of credit, they’ll need to have all the necessary documentation to show that they have a legal entity in the state where they operate. Financial institutions may ask to see the company’s Employer Identification Number and a Certificate of Good Standing. This is why it’s important for business owners to stay current on their state filings; ZenBusiness helps with this thanks to their Worry-Free Compliance Service.
Lines of credit can be secured or unsecured. There are differences between the two, the primary difference being who assumes the risk.
With a secured line of credit, the lender establishes a lien against an asset that belongs to the borrower. Assets used as collateral can be seized by the lender if the borrower fails to pay back the line of credit. One of the benefits of a secured line of credit is that lenders often offer higher credit limits and lower interest rates when there is collateral.
A financial institution assumes greater risk with an unsecured line of credit. This means that the business’s assets are not automatically subject to seizure if they cannot pay back the line of credit, though there may be other repercussions. There are disadvantages to unsecured lines of credit — they are harder to get, have higher interest rates, and have smaller borrowing limits.
There are multiple types of lines of credit to suit a variety of needs. These may be personal or for a business and include:
Each of these lines of credit examples has different requirements and uses.
A business line of credit is a good way to get access to necessary capital without having to take out a large loan.
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One of the most important components of securing a line of credit and financing a business is making sure that the company is compliant and organized. ZenBusiness has a variety of tools and services specifically designed to help business owners stay organized and grow, including a Business Plan Template that can be beneficial when seeking financing.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
Written by ZenBusiness Editorial Team
The ZenBusiness Editorial Team has more than 20 years of combined small business publishing experience and has helped over 850,000 entrepreneurs launch and grow their companies. The team’s writers and business formation experts are dedicated to providing accurate, practical, and trustworthy guidance so business owners can make confident decisions.
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