When to Use a Line
of Credit, and When Not To

Last week built the forecast and tightened the two levers that feed it. This week starts where those run out. Sometimes the projection shows a shortfall that collections cannot close and payables cannot absorb, and the question becomes whether to borrow.

A line of credit is the instrument most often recommended for that moment, and it is genuinely well-suited to some versions of it. It is also routinely used for a problem it cannot solve, at which point it converts a cash flow issue into a debt issue and buys a few months in the process. The difference between those two outcomes is visible in advance, in the forecast you already built.

What Makes It Different From a Loan

A term loan hands you a lump sum and starts charging interest on all of it immediately. A revolving line of credit approves a limit you can draw against, repay, and draw against again, and you generally pay interest only on what you have actually drawn.

That structure is the entire point. The SBA makes the same argument in describing its own working capital program: with a line of credit, interest is only charged when the loan is in use, which is what makes it an efficient way to handle working capital. If your gap is six weeks long and $40,000 deep, a line lets you carry roughly six weeks of interest on roughly $40,000. A term loan for the same need has you paying interest on the full amount for the full term, most of it while the money sits in your account doing nothing.

The Test: Does the Gap Close on Its Own?

This is the whole question, and your 13-week projection answers it. Look at the week where the balance dips below your floor, then look at the weeks after it. If the line recovers because money you have already earned arrives, the gap is a timing problem and a line of credit is built for it. If the line keeps descending, borrowing does not fix anything. It funds the descent and adds a payment to it.

• Good fit Bridging receivables you are confident about. The work is delivered, the invoices are out, and the customers have a history of paying. You are borrowing against money that already exists, for the weeks between doing the work and being paid for it.
• Good fit Predictable seasonal swings. A business with a heavy fourth quarter and a thin first one has a shape, not a problem. A line smooths a curve you can see coming and repays itself when the season turns.
• Good fit Inventory or payroll ahead of a known contract. You have the order in hand and need to fund the work before the payment arrives. The repayment source is identified before you draw, which is what separates this from hoping.
• Depends Taking a growth opportunity. Workable when the new revenue has a realistic date attached and you have modeled what happens if it slips by a quarter. If the payback exists mostly in a projection, a term loan sized to the actual investment is usually the more honest structure.
• Poor fit Covering a recurring operating shortfall. If the business spends more than it collects every month, the line becomes a slow-motion overdraft. It will run to the limit, and the underlying gap will be larger by the amount of interest paid to postpone it.
• Poor fit Long-lived assets. A vehicle, a build-out, or heavy equipment should be financed over the life of the asset. Funding a five-year asset with a facility that can be reduced or called at renewal is a mismatch that tends to surface at the worst moment.
• Poor fit Paying off other expensive debt with no plan change. Refinancing can be sound, but only alongside whatever fixed the cash flow that created the first balance. Otherwise you have cleared a line in order to fill it again.

What It Actually Costs

Most small business lines are priced at a spread over an index, and the common index is the bank prime loan rate. As of the Federal Reserve's H.15 release covering August 13, 2026, prime stands at 6.75%, unchanged through that week.

Prime is the starting point, not the price. Your rate is prime plus a spread set by your credit profile, time in business, collateral, and the lender. And the rate is only part of what you pay. Ask specifically about the annual or renewal fee, draw fees charged per advance, unused line fees on the undrawn portion, and whether the facility requires periodic clean-up periods where the balance must return to zero. A line quoted at an attractive rate and loaded with fees can cost more than a plainer one quoted higher.

Where You Borrow Changes the Outcome

This is the part of the decision that gets the least attention and probably deserves the most. The Federal Reserve Banks surveyed 6,525 employer firms in the fall of 2025, and the differences between lender types are not subtle.

Start with approval. Fully approved applicants were most common at small banks, at 57%, higher than at any other lender type. Meanwhile the share of applicants going to online fintech lenders has climbed steadily, from 17% in the 2020 survey to 29% in the 2025 survey.

Then look at what borrowers said afterward. This is the figure worth carrying into any conversation with a lender.

Only 4% of borrowers found costs lower than expected, so some upward surprise is common everywhere. But nearly two in three at online lenders against roughly one in three at banks is a different order of problem. The survey also found that credit union and bank applicants were more satisfied with their experience than online lender and finance company applicants, and that the most common complaints about online lenders were high interest rates and unfavorable repayment terms.

None of that makes online lenders categorically wrong. Speed and accessibility are real, and a business that cannot get a bank yes has to weigh what is actually available. It does mean the convenience carries a measurable cost, and that reading the full terms matters more, not less, when the application takes twenty minutes.

The Product That Is Not a Line of Credit

A merchant cash advance is frequently marketed alongside lines of credit and works nothing like one. Rather than lending at a rate, the provider buys a share of your future sales, and repayment is taken as a percentage of revenue until a fixed total is repaid. There is no interest rate in the ordinary sense, which is precisely what makes the true cost hard to compare against a line quoted at prime plus a spread.

Virginia legislated on this specifically. In 2022 the Commonwealth enacted a registration and disclosure regime for sales-based financing, codified at §§ 6.2-2228 through 6.2-2238, and Virginia businesses are the beneficiaries of it. If you are considering one of these offers, the statute gives you a checklist.

The practical use of all this is simple. Ask for the disclosure form. A registered provider must give you one showing the finance charge and total repayment amount, and those two numbers let you compare an advance against a line of credit on something closer to equal footing. A provider who cannot produce it is telling you something.

The SBA Options Worth Asking About

Small business lines are not only a conventional bank product. SBA guarantees several structures through the 7(a) program, and the guarantee is what sometimes turns a marginal application into an approved one.

The 7(a) Working Capital Pilot was established to bring the various 7(a) line-of-credit methods into one program, offering monitored asset-based and transaction-based lines up to $5 million. It was effective August 1, 2024 and, per the Federal Register notice establishing it, runs through July 31, 2027. CAPLines remains the permanent umbrella for seasonal, contract, builders, and working capital lines. SBA Express is capped at $500,000 with faster lender-side processing.

Apply From Strength, Not From the Shortfall

Last Monday made this point in passing and it is worth the space now, because the timing of the application affects the terms more than almost anything else you control.

Wednesday Closes Arc 3

Wednesday, August 19, Arc 3 ends where it began, with the confusion that started the whole arc: a profitable business that runs out of money. We separated cash from profit in passing on August 10; Wednesday takes it head-on, covering why the two diverge, which parts of a growing business consume cash fastest, and how to read a profit and loss statement and a cash position side by side without one of them lying to you. It is the diagnostic underneath everything in these two weeks, and it explains why the borrowing question above is so often asked by owners whose books look fine.

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