Working Capital Lines of Credit

A line of credit sets a maximum amount of funds available from the bank, to be used when needed, for the ongoing working capital or other cash needs of a business.

The lines are typically offered for renewable periods that range from 90 days to several years, although extended periods are usually subject to annual reviews by the lender. The maximum amounts vary greatly; interest rates usually float and you pay interest only on the outstanding balance. Money is typically used for daily operations, such as inventory purchases, and to cover periodic or cyclical business fluctuations. Collateral for the loan is often accounts receivable or inventory.

From a lender's perspective, the adequacy of the borrower's cash flow is the most critical consideration. A commitment fee may be assessed by the bank for making a line of credit available to the borrower, even if the full amount is never used. An established business with a sound credit history may be able to obtain an unsecured revolving line of credit.


A commercial line of credit can, for better or worse, become an "evergreen" never-ending debt to a small business.

Frequently, a small business will open a working line of credit of, for example, $40,000. Because of the immediate cash needs of the business, the credit line is quickly topped out. The borrower's continuing cash shortage forces it to pay only interest on the loan and the principal is not reduced.

Commonly, working capital lines of credit are reviewed annually by the lender and they can either be renewed or called due. However, while lenders typically want the line of credit to carry a zero balance at some time during the annual period, the competitive banking environment may lead a bank to continually renew a maximized line of credit as long as the institution is receiving timely interest on the loan. Evergreen lines of credit become, in effect, indefinite term loans with a balloon payment of principal that poses risks to both the lender and the borrower.