Business Line of Credit: How It Works and How to Qualify

A business line of credit stands as one of the most versatile financing tools available to Dallas business owners. Unlike traditional term loans that provide a lump sum, a line of credit gives you access to a pool of funds you can draw from as needed. This comprehensive guide explains how business lines of credit work and what it takes to qualify.

Understanding Business Lines of Credit

We often describe a business line of credit as a credit card for your company, but typically with lower interest rates and significantly higher limits. You receive approval for a maximum amount, say $100,000, and you can borrow any portion of that cap whenever you need it. This structure means you only pay interest on the specific amount you use, not the full credit limit.

Imagine you have a $100,000 line and draw $30,000 to cover a bulk inventory purchase. You pay interest only on that $30,000. Once you repay it, those funds revolve and become available again immediately. This revolving nature makes lines of credit exceptionally flexible for managing the unpredictable cash flow cycles common in industries like construction and hospitality.

How Business Lines of Credit Work

The Draw Period Mechanics

Most business lines of credit feature a specific “draw period,” which typically lasts between 12 to 24 months for short-term lines or up to five years for traditional bank lines. During this window, you can borrow, repay, and borrow again up to your limit. After this period ends, the line effectively closes to new draws, and any remaining balance converts into a standard term loan that you must pay off over a fixed schedule.

Interest Rates and Hidden Fees

Interest rates on business lines of credit move in lockstep with the Prime Rate, which sat at 6.75% entering 2026. Traditional bank lines often float between Prime + 1% and Prime + 3%, putting effective rates in the 7.75% to 10% range. Online lenders take a different approach, often charging higher rates that can equate to 15% to 50% APR depending on risk.

Beyond interest, you must watch for specific fees that can increase your cost of capital:

• Draw Fees: Some lenders charge 1% to 2% of the transaction amount every time you pull funds.
• Inactivity Fees: You might face a monthly charge if you don’t use the line for a certain period.
• Maintenance Fees: Expect monthly or annual costs simply for keeping the account open, similar to an annual fee on a credit card.

Secured vs. Unsecured Lines

Secured lines of credit require collateral, such as business assets, real estate, or specific inventory. Lenders will file a UCC-1 financing statement to secure their interest in these assets, which allows them to offer lower interest rates and higher credit limits. Unsecured lines require no physical collateral but typically demand a personal guarantee and come with higher rates to offset the lender’s risk.

Types of Business Lines of Credit

Traditional Bank Lines

Banks offer the most competitive rates but uphold the strictest requirements. Institutions like Chase, Bank of America, or local Dallas banks typically look for established businesses with at least two years of history. The application process is thorough, often taking several weeks to complete, but the cost savings are substantial if you qualify.

SBA CAPLines

The Small Business Administration backs specific line of credit programs known as CAPLines, which can offer lines up to $5 million. These come in four distinct flavors to match your specific needs:

• Working Capital CAPLines: For general short-term operating needs.
• Contract CAPLines: Specifically to fund costs associated with a specific contract or purchase order.
• Seasonal CAPLines: Designed for businesses with clear peak seasons, like landscaping or retail.
• Builders CAPLines: For general contractors constructing or renovating residential or commercial buildings.

Online Business Lines

Fintech lenders like Bluevine, OnDeck, and American Express Business Blueprint (formerly Kabbage) focus on speed and accessibility. Our team sees clients get approved in as little as 24 to 48 hours with these providers. While the Annual Percentage Rates (APR) are higher than traditional banks, the speed of funding can be a lifesaver when you need to seize an immediate opportunity.

Business Credit Cards

For smaller credit needs under $50,000, business credit cards function as an accessible form of unsecured revolving credit. Many cards offer 0% introductory APR periods which can act as a free short-term loan if managed correctly. However, once that period expires, variable rates can spike above 20%, making them expensive for long-term borrowing.

Qualification Requirements

Debt Service Coverage Ratio (DSCR)

Lenders look closely at your Debt Service Coverage Ratio, which measures your cash flow against your current debt obligations. A DSCR of 1.25x is the standard minimum for most banks. This means for every $1.00 of debt payment you have, your business needs to generate $1.25 in net operating income.

Credit Scores

Personal credit health remains a primary filter for approval. Bank lines of credit generally require personal FICO scores of 680 or higher. Online lenders offer more flexibility, often working with scores in the 600 to 660 range, though they will charge higher rates to compensate for the lower score. For SBA products, lenders now look for a FICO SBSS (Small Business Scoring Service) score of at least 165.

Time in Business and Revenue

Most traditional lenders require at least two years of operating history to ensure stability. Online lenders may work with businesses as young as six months to one year old. Revenue requirements also vary, with banks often seeking $250,000 annually, while some fintechs will consider applications with annual revenue as low as $100,000.

Documentation Needed

Prepare to provide a comprehensive financial package to speed up underwriting:

• Business and personal tax returns (2-3 years)
• Bank statements (3-12 months)
• Year-to-date Profit and Loss (P&L) statement
• Balance sheet showing current assets and liabilities
• A debt schedule listing all current business loans

How to Improve Your Chances of Approval

Strengthen Cash Flow Management

Lenders want to see that you can handle additional debt without straining your operations. We recommend maintaining a healthy average daily balance in your business bank account, as this is a key metric lenders use to gauge liquidity. Consistent positive cash flow significantly improves your approval odds.

Build Business Credit Separately

Establish credit accounts in your business name and pay them consistently to build a Paydex score or Intelliscore. This creates a track record that lenders can evaluate separately from your personal credit. A strong business credit profile can sometimes help overcome a borderline personal credit score.

Reduce Existing Debt

Your debt-to-income ratio matters immensely during underwriting. Pay down high-interest merchant cash advances or credit card balances before applying. This increases your DSCR and shows lenders you have the capacity to take on the new line of credit.

Common Uses for Business Lines of Credit

Dallas businesses use lines of credit for numerous strategic purposes:

• Bridging Cash Flow Gaps: Covering payroll while waiting 60 to 90 days for client invoices to clear.
• Seasonal Inventory: Restaurants stocking up on inventory before the holiday rush or patio season.
• Emergency Repairs: Fixing a broken HVAC unit or delivery truck immediately without disrupting cash reserves.
• Opportunity Buys: Purchasing materials at a steep discount when a supplier runs a flash sale.
• Marketing Campaigns: Funding a new local ad push to drive revenue growth during a slow quarter.

Business Line of Credit vs. Term Loan vs. Credit Card

Selecting the right product depends on your specific need. The table below compares the three most common financing options.

Feature	Line of Credit	Term Loan	Business Credit Card
Best For	Ongoing cash flow, short-term needs	Large, one-time investments (Equipment)	Travel, small expenses, supplies
Interest Type	Paid only on amount drawn	Paid on full lump sum	Paid on revolving balance
Typical Rates	8% - 25% APR	7% - 15% APR	18% - 29% APR (after intro)
Repayment	Flexible (monthly/weekly)	Fixed monthly payments	Minimum monthly payment
Limit Range	$10k - $500k+	$25k - $5M+	$5k - $50k

While term loans work well for specific large purchases with predictable costs, lines of credit excel when you need flexibility. If you know exactly what you need and when, consider a term loan. If your needs vary or you want ongoing access to capital, a line of credit is usually the better choice.

Getting Started

At Equipment Financing Dallas Pros, we work with multiple lenders to help Dallas businesses secure appropriate lines of credit. Whether you qualify for prime bank rates or need to work with alternative lenders, we can guide you toward the right solution.

Contact us today to discuss your business needs and explore your options for establishing a business line of credit. With the right preparation and guidance, flexible funding can be within reach for your Dallas company.