cashflow
Overdraft / Credit Line
Pre-approved short-term borrowing facility - flexible cash buffer for working capital needs.
Definition
A credit line (or overdraft, in UK terminology) is a pre-approved borrowing facility from a bank. You draw what you need, when you need it, and pay interest only on the drawn balance. Typically used for working capital - covering short-term cash gaps between paying suppliers and collecting from customers. Pricing: typically prime rate + 1-4% for established small businesses. Discipline: a credit line is for short-term gaps, not for funding losses. Used to cover ongoing losses, it converts a working capital tool into a death spiral.
Types of US business credit lines
Three main structures. Unsecured line of credit: no specific collateral, based on business credit and personal guarantee, typical limits 25K to 250K, rates prime plus 3 to 7 percent. Secured line of credit: backed by specific collateral (AR, inventory, equipment, real estate), higher limits 100K to 5M plus, lower rates prime plus 1 to 3 percent. Asset-based lending (ABL): borrowing base calculated as percentage of eligible AR plus inventory, advance rates 75 to 90 percent on AR and 30 to 70 percent on inventory, rates SOFR plus 2 to 5 percent. SBA Express line of credit: government-guaranteed, limits to 500K, rates capped at prime plus 4.5 to 6.5 percent, slower approval but better terms for businesses with limited collateral. Match the line type to your collateral, scale, and pricing needs.
Establishing a line before you need it
US banks lend to businesses with cash, not to businesses without. The right time to establish a credit line is when business is healthy and you do not need to draw it - 12 to 24 months before any cash crunch you might foresee. Approval requirements at most US banks: 2 plus years of business operating history, 2 years of tax returns showing profitability, current financial statements, personal financial statements from owners, business and personal credit checks. Typical approval timeline: 30 to 90 days for traditional banks (Bank of America, Wells Fargo, Chase, regional banks), 7 to 21 days for fintech lenders (Bluevine, Lendio, OnDeck), 60 to 120 days for SBA-backed lines. Approach 2 to 3 lenders simultaneously to compare terms; rates and limits vary significantly.
Pricing and total cost
US credit line pricing structure beyond interest rate. Interest: applied only to drawn balance, typically variable rate (prime plus margin) reset monthly. Annual fee: 100 to 500 dollars typical for small lines, 0.25 to 1.0 percent of credit limit for larger lines. Origination fee: 0 to 2 percent of credit limit at setup (negotiable). Unused line fee: 0.25 to 0.5 percent annually on undrawn balance (only on some lines). Maintenance: monthly statements, annual financial review, occasional appraisal of pledged collateral. Total all-in cost for a 250K US small business credit line: typically prime plus 3 to 5 percent on drawn balance plus 500 to 1500 annual fees. Compare carefully across lenders; headline rate plus fees can vary by 2 to 3 percentage points across competitors.
Avoiding the credit line death spiral
The most common US small business failure pattern with credit lines: business losses cause negative cash flow, credit line draws cover the gap, balance grows, interest costs grow, business cannot pay down the line, eventually maxes out at limit, lender demands payment, business cannot pay, bankruptcy. The discipline: a credit line is a bridge across a defined gap (seasonal cash flow, large customer payment delay, growth working capital), not a substitute for profitability. Set internal rules: if line is drawn for more than 90 days continuously, investigate root cause; if drawn for more than 180 days, the business has a structural problem requiring action beyond financing; if balance grows month-over-month for 3 consecutive months, escalate to crisis review. Lenders watch utilization patterns; persistent high utilization triggers covenant reviews and rate increases.
FAQ
How much credit line should I have?
Target: 1 to 3 months of operating expenses as available credit, in addition to cash reserves. A US service business with 50K monthly OpEx should target 50K to 150K credit line. Above that, line size benefits diminish (you would not actually draw that much in a typical stress scenario). Below that, line is too small to bridge meaningful gaps. The line is insurance, not working capital substitute - it sits unused most of the time. Build credit line capacity alongside cash reserves, not as a replacement for them.
Should I use a credit card or a credit line?
Both, for different purposes. Business credit cards: best for routine purchases under 25K monthly, vendor payments, and 25 to 55 day free float. Earn 1 to 5 percent cashback or points on spend. Pay in full monthly to avoid 18 to 30 percent APR on revolved balance. Credit lines: best for larger amounts, longer holding periods (15 to 90 days), and lower interest rates (8 to 12 percent versus 20 to 30 percent on cards). The smart US small business uses cards for routine transactional float and credit lines for occasional larger gaps.
What is a 'cleanup period' on a credit line?
Many US bank credit lines require an annual cleanup period - typically 30 to 60 consecutive days where the line is fully paid down to zero. The purpose: demonstrate the line is being used for working capital cycles, not as permanent term debt. Failing to clean up annually can trigger conversion of the line to a term loan (locking you into amortized repayment) or cancellation. Plan for cleanup; if you cannot consistently pay the line to zero annually, you likely need a term loan rather than a line of credit.
Will a personal guarantee be required?
Almost always for US small business credit lines under 1M, regardless of business credit quality. Personal guarantee makes the owner personally liable if the business defaults - exposing personal assets (home, savings, investments). For US LLC and corporation owners, this partially undoes the liability protection of the business entity. Larger lines (over 1M) and businesses with several years of strong financials can sometimes negotiate limited or no personal guarantees. SBA-backed lines always require personal guarantees from 20 plus percent owners. Read PG terms carefully; some PGs are joint and several with co-guarantors (full liability), some are limited to specific assets.
What happens if I cannot pay the line?
Escalating stages of US lender response. Stage one (30 days delinquent): collection calls, default notice. Stage two (60 to 90 days delinquent): demand for full payment, freeze of further draws, covenant review. Stage three (90 plus days): lender accelerates the line (full balance due immediately), pursues legal action against business and personal guarantors. Stage four: judgment, asset seizure, business or personal bankruptcy. Practical advice: if you anticipate inability to pay, contact your lender before becoming delinquent. Banks prefer restructuring to default; many will modify terms (extended amortization, rate reduction, partial forbearance) for borrowers who communicate proactively.
In your business
- →Establish a credit line when you don't need it - banks lend to businesses with cash, not businesses without
- →Use the line for short-term gaps, never to fund ongoing losses
- →Pay it down to zero periodically - perpetually drawn lines signal trouble to lenders