Line of credit LOC

The defining feature is revolving availability. Draw $40,000 against a $100,000 line, repay $15,000, and $75,000 is available again. That property is what makes a line the correct instrument for a working capital cycle and a term loan the wrong one.

The variables

• Committed or uncommitted (demand). A committed line obliges the lender to fund draws for the commitment period if no default exists. An uncommitted or demand line does not — the lender may decline a draw or call the balance. Most small-business lines are far closer to demand than borrowers realise
• Secured or unsecured, and if secured, whether against a borrowing base that fluctuates with receivables and inventory
• Fee structure: an origination or facility fee, an annual renewal fee, a commitment or unused-line fee on undrawn availability, and sometimes a per-draw fee
• Cleanup requirement: a covenant requiring the balance to reach zero for a stated period each year, proving the line is funding a cycle rather than a permanent deficit
• Covenants and MAC clause: financial covenants, and a material adverse change provision permitting suspension

What is sold as a line and is not one

A large share of online "business lines of credit" are a series of separate term advances under a master agreement. Each draw creates its own fixed-payback obligation with its own schedule and its own draw fee. Repaying draw one does not increase what is available for draw two beyond restoring the notional limit, and the cost is a per-draw fee rather than interest on the outstanding balance. It behaves like a pre-approval for repeat term loans.