What is a business line of credit?
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A business line of credit is a form of finance that allows businesses to borrow up to an agreed limit and use that money as needed. You’ll only pay interest on the amount that you use and can repay at any time without a penalty. This type of loan is typically used for short-term purposes, such as smoothing cash flow gaps.
As long as you don’t exceed the limit of your business line of credit, you can dip into it where needed in a similar way to how you’d use a business credit card. Funds can also be borrowed again once they’ve been repaid. The interest rate on a business line of credit is usually variable, meaning it can change over time.
Reasons for acquiring a business line of credit include:
- cash flow management
- investing in projects
- one-off repairs
How does a business line of credit work?
Let’s look at an example of how a business line of credit works in practice.
Shane runs a small construction business specialising in building patios and decking. He wants to take on as much work as he can, but cash flow can be tight from job to job. If a previous customer hasn’t paid on time he can’t afford the materials needed to start the next one.
To overcome this challenge, Shane secures a business line of credit of up to £20,000. Within the agreed loan timeframe, he’s able to borrow and repay any cash he needs to cover his material costs. He only pays interest for the time he keeps the money, making it a good short-term finance solution.
Differences between a business line of credit and a business credit card
The key differences between a business line of credit and a business credit card lie in the amount you can typically borrow and the interest you’ll pay. A business line of credit will usually have a lower interest rate and a higher credit allowance, making it a suitable option for larger planned expenses. In contrast, business credit cards have higher interest rates that make them more suitable for day-to-day expenses.
Business credit cards sometimes offer perks and benefits that you can claim as you spend - including cashback offers or business insurance packages - whereas a business line of credit tends to be a standalone finance solution.
And finally, a business line of credit will usually have a fixed timescale. Once this period is up, you’ll need to reapply or at least renew your access to this funding. On the other hand, as long as you’re keeping up with your repayments, you’ll be able to hold your business credit card indefinitely.
Differences between a business line of credit and a business loan
If you’re looking to borrow a large sum of money all at once then a business loan might be the best option for you. Once approved, you’ll receive your funding in one lump sum and will pay interest on the full amount. A business line of credit is a little different, giving you access to a pool of funds that you can dip in and out of where needed. And, you’ll only pay interest on the duration of time you keep the money for.
Differences between instalment loans vs a business line of credit
The main difference between instalment loans and a business line of credit is that instalment loans are typically for a fixed amount, while a business line of credit is for an adjustable amount. So, if you’re looking to borrow, then you may want to consider whether you’d rather pay a fixed amount each month (instalment loans) or if you’d rather have the freedom to pay a varied amount instead (a business line of credit).
Alongside this, instalment loans typically have a fixed interest rate, while a business line of credit may have a variable interest rate. Depending on the market, this means that you could end up paying more in interest when taking out a business line of credit.
How to apply for a business line of credit
Step 1: Check your business credit score and credit history
This will help you determine if you’re eligible for a business line of credit.
Step 2: Compare interest rates from different lenders
Once you know your credit score, explore what different lenders are offering and choose one that meets your needs.
Step 3: Complete the loan application form
You’ll need to provide personal and financial information, such as your income and debts, along with bank statements and company accounts.
Step 4: Wait for a decision
Once the lender has reviewed your application, they'll decide on whether to approve you for a business line of credit. If you’re approved, they'll give you a credit limit and an interest rate. You can then borrow money against this credit limit as needed.
Line of credit providers
- SafetyNet: Up to £1,000 credit and available to both businesses and individuals.
- Tappily: Offers a revolving business line of credit with a limit of £2,500.
- Paragon Bank: Provides revolving credit facilities from £5 million to £25 million, usually up to three years.
- Just Cashflow: Unsecured business line of credit up to £50k or secured up to £1M, with no monthly capital repayments required.
- 365 Business Finance: Get a business line of credit from £10,000 up to £300,000 in unsecured capital funding.
Is a business line of credit right for your business?
If you sometimes find yourself in need of a cash flow boost then a business line of credit could be a good option for you. It’s a form of finance that can offer you peace of mind, allowing you to dip into it where needed and only pay interest on the time you keep the cash for. As long as you use it responsibly, you’ll usually have access to that credit line for several years before needing to reapply.
iwoca's Flexi-Loan is very similar to a business line of credit, and is great for businesses that need access to cash quickly, easily and – it’s in the name – flexibly! Borrow up to £500,000 over 24 months and get approved in just one working day. You’ll only pay interest for each day you have the funds, can repay early (whenever you like and however many times you like), and top ups are available.
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