Types of business credit facilities — a field guide for borrowers
Updated May 2026.
A facility letter that quotes a “line of credit” can describe several different products, each with its own cost shape, collateral rules, and bank incentives. A revolver and an overdraft accrue interest the same way but reserve capital differently. An asset-based lending line uses your receivables and inventory as the limit. A letter of credit subfacility does not lend cash at all; it lends the bank's credit standing to a third party on your behalf. The labels matter, often more than borrowers expect.
This page is the orientation that should come before the cost or income math — a working map of the facilities you may see on a term sheet, with one paragraph each on what it is, when banks offer it, and what it charges. The cost calculator and the lender income calculator model the dollar amounts. This page covers what you are actually looking at. Once a specific facility is on the table, the pricing mechanics are on spread vs yield (and how the rate is built up on base rate vs cost of funds), and what is movable at signing is on the negotiation memo.
How facilities differ on three axes
Most differences between business credit facilities collapse into three axes. Once you know which axis a given line item is describing, a term sheet stops feeling like a wall of vocabulary and starts feeling like a small grid of choices.
- Drawn on demand vs. lump-sum. Revolving products (overdraft, revolver, ABL line, working-capital line) let you draw, repay, and re-draw against a limit. Lump-sum products (term loans and most equipment loans after the draw-down period) disburse the full amount once and amortize on a schedule.
- Secured vs. unsecured. Smaller overdrafts and some relationship revolvers can be unsecured or backed only by a personal guarantee. Larger revolvers, ABL lines, equipment lines, and most SBA-backed facilities are secured — by specific assets, by a borrowing base, or by a general lien on the business.
- Committed vs. uncommitted / demand. A committed line means the bank generally must honor draws within the committed limit and tenor, provided the conditions in the agreement are satisfied. An uncommitted or demand line means the lender retains the right to reduce, freeze, or call the facility — often on short notice. The distinction is invisible in casual conversation and decisive in a downturn.
The family of business credit facilities
The revolving family on the left, lump-sum products on the right. Working-capital lines, LC subfacilities, and ABL lines are flavors of revolver. Equipment lines and term loans are nearby comparison products with different cost shapes — useful to know about, but no longer revolving once they amortize.
Business credit facilities
Revolving family
- Business overdraft / operating line
- Revolving credit facility
- • Working-capital line
- • LC subfacility
- • ABL line
Nearby (not revolving)
- Equipment financing line / term-out
- Term loan
The facilities, by type
Six facility types you may see on a term sheet. Each card covers what the facility is, when banks offer it, how it charges, and one structural quirk worth knowing before you sign.
Business overdraft / operating line
An overdraft is a short-term revolving line attached to a deposit account: when the account drops below zero, the overdraft covers the shortfall up to the agreed limit, and interest accrues only on the negative balance. Banks typically offer it as the working-capital companion to a primary operating account, sized to a few weeks of payables. It charges interest on the drawn balance day by day, a commitment fee on the undrawn portion, and an arrangement or annual renewal fee on the facility itself. The structural quirk to watch: in many US commercial overdraft agreements the lender retains the right to reduce, freeze, or call the line on short notice — so available capacity is conditional, not guaranteed. For the dollar math and the daily-accrual formula, the business overdraft cost calculator and the how overdraft interest is calculated guide handle every line of the cost stack.
Revolving credit facility
A revolver is a committed multi-year line — the bank commits to a fixed limit you can draw, repay, and re-draw repeatedly through the term, subject to annual review language and the financial covenants in the credit agreement. Banks offer revolvers to established borrowers with predictable working-capital cycles, in sizes that justify the documentation cost — bilateral lines tend to be smaller, while syndicated facilities can reach much larger sizes. The cost stack: lending rate on the drawn balance, a commitment fee commonly quoted on the undrawn portion, and an upfront arrangement fee at signing. The structural quirk: committed is the whole point. The bank generally must honor draws within the committed limit and tenor if conditions in the agreement are satisfied. That protection is what distinguishes a revolver from an overdraft in a credit squeeze.
Working-capital line of credit
A working-capital line is the SMB-flavored revolver: a committed line sized to your seasonal cash-conversion cycle, with an annual review rather than a multi-year commitment. Banks offer it as the next step up from a deposit-attached overdraft, once the business is large enough to support standalone documentation. The math is the same as a revolver — interest on the drawn balance, commitment fee on the undrawn portion, arrangement fee at signing — and the lender usually expects regular borrowing-base or financial reporting. The structural quirk: the annual review is real. A working-capital line that “auto-renews” can still be reduced or repriced at review if the business's financials have moved. Many SBA CAPLines products sit in this category as a federally-backed flavor.
Asset-based lending (ABL) line
An ABL line is a revolver whose limit floats with the borrower's working assets. The contractual limit is a borrowing base — often an advance rate (e.g. 80%) on eligible accounts receivable plus a smaller advance rate (e.g. 50%) on eligible inventory. Banks offer ABL when the borrower's cash flow is too lumpy for a covenant-driven revolver but the receivable and inventory base is real. It charges the standard revolver stack plus ABL-specific costs the borrower pays — periodic field audits, ongoing collateral monitoring, and borrowing-base certifications. The structural quirk: a slow collections month can shrink your available capacity even if the agreement is otherwise unchanged. ABL is more flexible than a covenant revolver on the upside and more sensitive than a fixed-limit line on the downside.
Letter of credit subfacility
An LC subfacility sits inside a revolver and issues letters of credit to third parties — a landlord, a foreign supplier, a state regulator — promising that the bank will pay if you default on the underlying obligation. No cash is borrowed unless and until an LC is drawn. The borrower pays an LC issuance fee for as long as the LC is outstanding — often quoted as an annual percentage of the LC face amount, with standby LCs commonly priced higher than commercial LCs. The structural quirk worth knowing: outstanding LCs often reduce cash availability under the parent line, depending on the agreement. Where the LC consumes availability, a $1M revolver with a $200K LC outstanding has $800K of cash availability left, not $1M. The lender income calculator models LC issuance fees and the “LC consumes availability” toggle directly.
Equipment financing line / term-out
An equipment line has two lives. During the draw-down period (often 6–24 months) it behaves like a revolver: you draw to fund specific equipment purchases, the bank perfects a lien on each piece, and interest accrues only on what you have drawn. At the end of the draw period the outstanding balance terms out into an amortizing loan — fixed monthly payments over a multi-year tenor, often matched to the useful life of the financed equipment. Banks offer it when a business is in an expansion or fleet-replacement cycle and the lender wants the predictability of secured, asset-specific lending. The structural quirk: the term-out date is hard. If you have not drawn by then, unused capacity disappears, and the amortizing piece begins on a fixed schedule the borrower cannot easily renegotiate without refinancing.
Term loan — when you have left revolving territory
A term loan is not a credit facility in the revolving sense — it is a lump-sum loan disbursed once, repaid on an amortization schedule over a multi-year tenor. It is included here only so the orientation is clean: if your term sheet is amortizing rather than revolving, you have left the facility category and entered the loan category. Different cost shape (origination fee + interest on a declining balance), different decision logic (rate and prepayment terms matter more than commitment terms), different math. For the payoff schedule, see the small business loan payoff calculator. For the three-product cost ranking when you are weighing a term loan against a revolver, see the overdraft vs. term loan vs. credit card comparator.
Lines you may see in a term sheet
Term sheets and credit agreements repeat the same labels across facility types. Plain-English meanings, and why each one matters to a borrower.
| Term-sheet label | Plain English | Why borrowers should care |
|---|---|---|
| Committed | Bank generally must honor draws within the committed limit and tenor, subject to conditions in the agreement. | Protects availability through downturns and covenant noise. |
| Uncommitted | Bank may decline future draws at its discretion. | Cheaper to set up, but the capacity is not contractually reliable. |
| Advised | Indicative limit communicated by the bank but not legally committed. | Treat as a soft cap, not a binding line. |
| Demand | Bank may call the outstanding balance on short notice. | Best for short-cycle needs where you have a clear repayment source. |
| Revolving | Drawn amounts repaid become available again within the limit. | Optionality has value; you pay for it in the commitment fee. |
| Evergreen | Auto-renews on review unless either party gives notice. | Convenient, but the renewal is not contractually guaranteed. |
| Borrowing base | Limit formula tied to advance rates on eligible AR and inventory. | Available capacity moves with collections and stock — monitor it monthly. |
| LC sublimit | Portion of the parent line reserved for issuing letters of credit. | Outstanding LCs usually reduce cash availability under the parent line. |
How to tell which one you actually have
A few practical checks on the facility letter that usually settle the question.
- Is there a scheduled maturity or review date? A specific multi-year maturity points to a revolver, a working-capital line, or an equipment line. An annual review date without a hard maturity is closer to an evergreen or overdraft posture.
- Is the limit a fixed number, or tied to your assets? A fixed dollar limit is a conventional revolver or overdraft. A borrowing-base formula is an ABL line.
- Is there letter-of-credit language? Sublimit references, issuance fees, and standby/commercial LC distinctions mean the facility includes an LC subfacility — and its outstanding LCs may be reducing your cash availability.
- Does it amortize or revolve? A monthly payment that pays down principal on a fixed schedule is amortizing — a term loan or the term-out leg of an equipment line. A facility that only requires interest on the drawn balance, with principal repaid at your discretion, is revolving.
- Is it callable on demand? Many overdraft and uncommitted-line agreements give the lender the right to reduce, freeze, or call the facility on short notice. The availability you see is conditional, not guaranteed.
Once you know what kind of facility you are looking at, the cost and income math follows. For exact dollar cost on a single draw, the cost calculator. For what the bank earns on the same line, the income calculator. For why a 3% spread doesn't mean a 3% yield, the spread vs. yield guide.
Frequently asked questions
Is a revolver the same as an overdraft?
Close cousins, not the same product. Both let you draw, repay, and re-draw against a limit, and both accrue interest on the drawn balance day by day. The structural difference is the commitment. A revolving credit facility is typically a committed multi-year line — the bank generally must honor draws within the committed limit and tenor if conditions in the agreement are satisfied. A business overdraft, in many US commercial agreements, can be reduced, frozen, or called by the lender on short notice. Same daily-accrual math, different reliability of the available capacity.
How is an ABL line's limit different from a regular revolver's?
On a regular revolver the limit is a fixed dollar number agreed at signing. On an asset-based lending line the limit floats with your borrowing base — usually an advance rate (e.g. 80%) applied to eligible accounts receivable, plus a smaller advance rate (e.g. 50%) on eligible inventory. The available amount can drop in a slow collections month even if the agreement is otherwise unchanged. ABL facilities also carry monitoring costs the borrower pays — periodic field audits, borrowing-base certifications — that conventional revolvers usually do not.
Does a letter of credit subfacility actually cost me interest?
Not in the way a cash draw does. An LC subfacility issues a letter of credit to a third party — your landlord, a foreign supplier, a state regulator — promising the bank will pay if you default on the underlying obligation. No cash is borrowed unless and until the LC is drawn against. The borrower pays an LC issuance fee (often quoted as an annual percentage of the LC face amount, with standby LCs commonly priced higher than commercial LCs) for as long as the LC is outstanding. If the LC is ever drawn, the cash advance then accrues interest like a regular drawdown.
Where to go next
Start with one of these reader paths, depending on where the facility is in front of you.
- If you are still comparing facilities head to head, the overdraft vs. term loan vs. credit card comparator ranks the three by total dollar cost across realistic holding periods — the natural follow-on to the taxonomy on this page.
- If a specific overdraft or line is on the table and you need to price it, run the numbers in the business overdraft cost calculator and read how the interest is actually calculated so you can sanity-check the bank's quote line by line.
- If the term sheet is in front of you, the negotiation memo walks the line items most likely to move at signing — spread, commitment fee, covenant cushion, the demand-vs-committed clause — and what to ask for instead of accepting the draft.
- Optional, if you want the bank's side of the math: net interest income on a credit line shows how utilization, not headline rate, is what the lender is actually solving for. Useful context when you want to understand what is negotiable and why.
Sources and methodology
Category-level framing on committed, uncommitted, advised, and demand language follows the OCC Comptroller's Handbook on Loan Portfolio Management. SBA-backed working-capital lines reference SBA CAPLines and the SBA 7(a) program. No specific lender or product is endorsed. This page is informational only — confirm any facility-specific term, fee, or covenant against the actual agreement and your bank's relationship team or a qualified accountant. See the editorial policy for how we source numbers.