What a Business Line of Credit Charges on Draws, and How Repayment Restores Your Limit
A business line of credit charges interest only on the amount drawn, and lenders can cut or close it. Here is how the mechanics work, with the latest Federal Reserve figures.
A business line of credit gives a company a set amount it can draw on whenever cash runs short. Interest applies only to the portion in use, and money the business repays becomes available to borrow again.
Recent Federal Reserve data show how rates on small business credit have moved and how online lenders compare with banks for firms that borrow. The figures below come from the Kansas City Fed's second-quarter 2026 lending survey, the Fed's 2026 small business credit report and its May 2026 Financial Stability Report.
What a Line Gives a Business Before It Draws
The U.S. Small Business Administration describes a line of credit as money available on demand, up to a limit set for that line. A business can take funds whenever it needs them, as long as the outstanding balance stays within the limit.
Interest is charged only on the amount drawn. SBA.gov uses a $20,000 line with no withdrawals as its example: no interest is owed, and the full $20,000 remains available. Interest and fees apply to the portion in use, not to the unused balance.
How Repayment Restores the Available Balance
Principal a business pays back becomes available to borrow again, so the same line can be drawn, repaid and drawn once more.
SBA.gov stresses staying current on payments, because unpaid balances can build into costly long-term interest.
What Collateral and Lender Decisions Can Change
Lines can be secured by collateral such as equipment or accounts receivable, according to SBA.gov.
The SBA notes that a line can be shut down or drastically reduced. Each line carries its own limit, and draws cannot exceed that limit. A business that plans around a fixed limit should keep the possibility of a reduction in view.
Latest Kansas City Fed Readings on Line Rates
In the Kansas City Fed's Small Business Lending Survey for the second quarter of 2026, median rates on new lines of credit at urban banks fell from the prior quarter. Quarter over quarter, fixed rates on those lines dropped 36 basis points, while fixed rates at rural banks rose 29 basis points. Compared with a year earlier, variable rates fell 94 basis points at rural banks and 92 basis points at urban banks.
Spreads over the interest rate floor moved in the same direction. Median line of credit spreads fell 96 basis points year over year, and term loan spreads fell 27 basis points. Among variable-rate term loans, rates were highest at urban banks, at 7%, and lowest at rural banks, at 6.7%.
About 26% of respondents reported a change in small business loan demand. On net, about 3% reported stronger demand, driven by small and midsized banks, and large banks were the only group with a net decrease. On net, about 8% of respondents reported tightening standards.
Its rate charts draw on 88 of 146 respondents, and about 88% of that group is urban. In this survey, small business lending means commercial and industrial loans to organizations generally defined as having less than $5 million in gross annual revenue, unless otherwise noted. As of 2025:Q3, a methodology change affected the calculation of median spreads for term loans and lines of credit.
“A line of credit is a limit, and interest attaches only to what has been drawn.”
Online Lenders and the Gap Between Expected and Actual Cost
The Federal Reserve's 2026 Report on Employer Firms, based on the 2025 Small Business Credit Survey, shows a larger share of applicants seeking financing from online lenders. In that survey, 29% of applicants sought financing from online fintech lenders, up from 17% in the 2020 survey. Applicants most often sought financing at large banks, followed by online lenders and then small banks.
Of firms that borrowed from online lenders, 60% said actual borrowing costs were higher than expected, and 4% said they were lower. For borrowers at small banks, 37% reported higher-than-expected costs, and for large banks the figure was 32%.
High interest rates and unfavorable repayment terms were the most common challenges at online lenders. Credit union and bank applicants reported higher satisfaction with their experiences than applicants at online lenders and finance companies, the report says.
The survey was fielded from 3 September to 14 November 2025 and received 6,525 responses. It drew on a nationwide convenience sample of employer firms with 1 to 499 full- or part-time employees across all 50 states and the District of Columbia, not a random sample.
How the Broader Rate Picture Fits In
The Federal Reserve's May 2026 Financial Stability Report says rates on small business loans declined over the past two years along with the broader rate environment. It adds that they remain near the top of the range observed since 2008.
The same section cites the Kansas City Fed's finding that loan originations were little changed in the second half of 2025, while banks continued to tighten credit standards. Borrowing by firms has also changed. According to a March 2026 NFIB survey cited in the report, the share of firms that borrow regularly has flattened since the start of 2026, after a long decline.
Delinquencies are part of the picture as well. Short-term delinquency rates, up to 90 days, edged down but remained above pre-pandemic levels. Long-term delinquency rates have leveled off but remained elevated compared with pre-pandemic levels, the report says.
