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A line of credit (LOC) gives you flexible access to funds up to a set limit. But how does a line of credit work exactly? It allows you to withdraw money as needed, repay it, and borrow again. You only pay interest on the amount used—not the total limit—making it a smart way to manage business expenses, cash flow gaps, or unexpected costs.
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When you apply for a line of credit, your business gets access to a revolving credit limit. You can draw funds when needed and repay on your own schedule—as long as you stay within the agreed limit. That flexibility is what makes a line of credit so valuable.
For instance, if you’re approved for $ 20,000 and use $ 5,000, you’ll still have $ 15,000 available. Pay back $ 2,000, and your available balance increases to $ 17,000.
There are two types of LOCs:
A key question often asked is the difference between a line of credit and loan. A loan gives you a lump sum with fixed repayments. A line of credit is ongoing—you use and repay it as needed.
A line of credit shows on the balance sheet depending on your usage. Here are two examples.
Example 1: Positive cash flow
| Assets | Amount (USD) | Liabilities & equity | Amount (USD) |
|---|---|---|---|
| Fixed assets | Equity | ||
| Property | 150,000 | Paid-in capital | 100,000 |
| Equipment | 20,000 | Retained earnings | 25,000 |
| Current assets | Current liabilities | ||
| Inventory | 10,000 | Accounts payable | 8,000 |
| Accounts receivable | 12,000 | ||
| Bank | 25,000 | ||
| Total | 217,000 | Total | 217,000 |
Example 2: Active line of credit
| Assets | Amount (USD) | Liabilities & equity | Amount (USD) |
|---|---|---|---|
| Fixed assets | Equity | ||
| Property | 150,000 | Paid-in capital | 100,000 |
| Equipment | 20,000 | Retained earnings | 30,000 |
| Current assets | Current liabilities | ||
| Inventory | 10,000 | Accounts payable | 8,000 |
| Accounts receivable | 12,000 | Line of credit | 5,000 |
| Bank | 25,000 | ||
| Total | 217,000 | Total | 217,000 |
Lines of credit are ideal when:
Instead of applying for a new loan each time, a line of credit gives you access to what you need—when you need it. It also differs from a letter of credit, which is used mainly in trade to guarantee payments. That’s the difference between a line of credit and letter of credit.
With Payt, you gain full visibility over your accounts receivable. Our smart credit management software helps you automate reminders, follow-ups, and communication with your clients. That means more control, fewer overdue payments, and better decisions on using your line of credit.
Benefits of Payt:
Want to strengthen your financial position? Download our brochure or schedule a free demo today.
It gives you revolving access to funds, letting you borrow and repay flexibly up to a set limit. You pay interest only on what you use.
A loan is fixed and repaid over time. A line of credit is reusable, giving you more flexibility.
It’s a credit line granted without requiring collateral—typically with higher interest rates and stricter credit criteria.
A line of credit funds purchases; a letter of credit is a bank guarantee used in business transactions.
