A line of credit is an approved limit a business can draw against, repay, and draw against again. Interest is paid only on what is drawn.
A bank overdraft is the same arrangement reached from the other direction: the account is allowed to go below zero up to an agreed limit. Whether it is called a line of credit or an overdraft, the thing being bought is the same — permission to be short for a while — and everything below applies to both.
What it is for
The gap between paying for work and being paid for it. Materials and wages go out at the start of a job and the invoice is settled weeks later — see working capital and days to get paid.
A line covers that gap and is repaid when the invoice clears. Used this way the balance rises and falls and is periodically zero.
Where it goes wrong
A balance that never returns to zero is no longer covering timing. It has become permanent borrowing used to fund a shortfall, and the shortfall is still there.
The distinction is visible in the pattern rather than the amount. Drawn and repaid is healthy at any size; drawn and held is a signal to look at the underlying business.
Getting one
Lines are easier to obtain before they are needed. Applications are assessed on trading history, on debt service coverage, and usually on the owner's personal credit for a smaller business.
A business applying while short of cash is applying at the point it presents worst.
Cost
Interest on the drawn balance, and frequently a fee on the undrawn portion. Both belong on the debt schedule.