How a business line of credit works
A business line of credit is an approved limit you can borrow against whenever you need to. You draw funds, repay them, and the available balance goes back up, much like a credit card but usually with a higher limit and business terms. Most lines charge interest only on the amount you have drawn, not on the full limit, though some also charge draw fees, maintenance fees or an annual fee.
For restaurants and bars, a line of credit is the closest thing to a financial shock absorber. It handles the gaps that show up every month without the cost and paperwork of a new loan each time.
What restaurants use a line of credit for
- Buying inventory ahead of a holiday weekend, a big event or a seasonal menu change
- Covering payroll when a slow week lands on a pay period
- Paying for unexpected repairs before insurance or the vendor reimburses you
- Taking advantage of a supplier discount for paying early or buying in bulk
- Bridging a timing gap between catering invoices and payment
Lines of credit are poor tools for long-term projects. If you draw a line to fund a remodel and cannot pay it down for two years, you have built a term loan with worse terms. For projects, use a term loan or SBA loan.
Types of business lines of credit
- Bank and credit union lines. Usually the lowest cost and highest limits for established businesses. Expect financial statements, tax returns and often an annual review. Some are secured by business assets or real estate.
- Online and private lines. Faster approvals with lighter documentation, smaller limits, shorter repayment for each draw and higher cost.
- Secured vs unsecured. Secured lines use collateral and generally price better. Unsecured lines rely on cash flow and credit and usually require a personal guarantee.
Who qualifies
Line of credit lenders want to see that you will use the line responsibly and pay it down. They typically review:
- Time in business, with most lenders preferring at least a year and banks often wanting two or more
- Monthly revenue and deposit consistency from bank statements
- Personal and business credit
- Existing debt, including any merchant cash advances
- For bank lines, profitability from tax returns and financial statements
Newer restaurants may start with a smaller line and earn increases as they show a history of drawing and repaying.
What drives the cost
Ask about four things on any line: the interest rate on drawn funds, draw fees, maintenance or annual fees, and the repayment period for each draw. A line with a low headline rate and high fees can cost more than one with a slightly higher rate and no fees. Also ask whether the lender can reduce or freeze the line, and under what conditions, because a line that disappears in a slow season does not do its job.
Lines of credit in Colorado and Tennessee
The best time to open a line of credit is when you do not need it. Colorado operators with seasonal swings, from mountain towns to patio-heavy Denver neighborhoods, should set up a line after a strong quarter so the statements show their best months. Tennessee bars and restaurants that ride Nashville’s event calendar or Memphis’s festival season can use a line to staff up for big weekends without draining reserves. Suburban operators in places like Brentwood or Highlands Ranch with steadier deposits are often good candidates for lower-cost bank lines.
A line of credit pairs well with other financing. Many of our clients use equipment financing for the kitchen, a term loan for the build-out, and a line for everyday swings.
Questions owners ask
How does a business line of credit work?
You are approved for a maximum limit and can draw any amount up to it, whenever you need it. You repay what you draw, plus interest and any fees, and the repaid amount becomes available again. Most lines charge interest only on drawn funds. Bank lines are often reviewed each year, and online lines may require each draw to be repaid over a set period.
Is a line of credit better than a term loan?
They do different jobs. A line of credit is best for recurring, short-term needs like inventory and payroll gaps. A term loan is best for one-time projects with a set budget, like a remodel or new location. Using a line for a long project usually costs more, and using a term loan for weekly swings means paying interest on cash you are not using.
Do I pay interest on the full line?
Usually not. Most business lines of credit charge interest only on the amount you have drawn. Some charge fees regardless of use, such as an annual fee, a maintenance fee or a fee each time you draw. Read the fee schedule closely and compare total cost, not just the interest rate.
What do I need to qualify for a restaurant line of credit?
Most lenders want at least a year in business, steady monthly deposits, reasonable personal credit and manageable existing debt. Online lenders may approve on an application and bank statements. Banks usually add tax returns and financial statements and may require collateral. Starting with a smaller line and using it well is a common path to a larger one.