What is a Line of Credit?
A line of credit is a revolving limit a lender approves and a brand draws on as it needs cash, paying interest only on what it has drawn and repaying to free the limit for the next draw. Banks usually review a line each year; many fintech lenders set a repayment term for each draw. Banks often ask for a lien on business assets and a personal guarantee from the owners.
Asset-based lending is a line of credit sized by collateral. Instead of a fixed limit, the lender sets a borrowing base: an advance rate applied to eligible receivables plus a lower advance rate applied to eligible inventory. The limit moves each month with the assets the brand reports.
How Lines of Credit Work for an Ecommerce Brand
A line suits the timing gaps every product brand has: a factory deposit due before marketplace payouts land, a pre-season build drawn in late summer and repaid after the holidays, or a wholesale account paying on 60-day terms. The quoted interest rate covers most of the cost, though origination, unused-line and field-exam fees add to it, so a line is easier to compare than a fee-based advance, and when a brand qualifies it is often among the cheaper sources of outside money.
Asset-based lending tends to suit larger brands carrying meaningful inventory and wholesale receivables, with a finance function that can produce an accurate borrowing-base report every month and host field exams. It rarely suits a young brand selling only through marketplaces, whose receivables are payouts due within days.
What a Lender Looks At
For a standard line, the lender reads bank statements, profit and loss statements, a balance sheet and tax returns, and checks that cash flow covers existing debt payments. An asset-based lender looks harder at the collateral: SKU-level inventory counts and unit costs, aged and obsolete stock, receivables aging by customer and how concentrated those receivables are in one account. Most lines carry covenants, such as a minimum ratio of cash flow to debt payments, and a breach can let the lender reduce or close the line.
Further Reading
Ecommerce Financing Options: Which Funding Type Fits Which Purpose
Formula
Interest on a Draw = Amount Drawn × Annual Rate × (Days Drawn ÷ 365)
Borrowing Base = (Eligible Receivables × Receivables Advance Rate) + (Eligible Inventory × Inventory Advance Rate)
Example
A brand with a $250,000 line at 10% a year draws $150,000 to pay a factory deposit and repays it 60 days later when holiday payouts arrive.
- Interest: $150,000 × 10% × (60 ÷ 365) = $2,466
A larger brand on an asset-based line reports $400,000 of eligible wholesale receivables and $1,000,000 of eligible inventory at cost. With illustrative advance rates of 85% on receivables and 50% on inventory:
- Receivables: $400,000 × 85% = $340,000
- Inventory: $1,000,000 × 50% = $500,000
- Borrowing base: $340,000 + $500,000 = $840,000
If $200,000 of that inventory has aged past the lender's cutoff and is excluded, eligible inventory falls to $800,000 and the base falls by $100,000 to $740,000. Each lender sets its own advance rates and eligibility rules.
General education only, not legal, tax or investment advice; how a term applies to your brand depends on your own documents and advisers.