A business line of credit is a form of finance that allows businesses to draw from a sum of capital up to an agreed limit. It’s typically used to meet working capital needs and cover cash flow gaps, with companies only paying interest on the amount used.

We explore the ins and outs of business lines of credit, how they work, who can benefit most from this type of finance agreement, plus alternatives to consider.

How does a business line of credit work?

A business line of credit works slightly differently from business loans, in that it’s a form of revolving credit. Companies are offered an amount of credit from which they can draw down what they need, when they need it, repaying funds in line with agreed repayment schedules. Interest is only charged on the funds actually used, rather than the full credit amount available. 

Here are the key components of a business line of credit:

• Lenders agree on a credit limit and make funds available for businesses.
• You can draw down funds when required for various operational needs.
• You’re charged interest on the funds you draw down until they are repaid, then your full limit becomes available again – interest rates are usually variable and lenders will agree on the frequency/timeframe of repayments.
• If required, you can apply to extend your credit limit, which may be granted if you’ve been prompt with repaying funds. 

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 or business overdraft. 

Typical uses of a business line of credit include:

• Cash flow management (reducing the impact of cash flow problems caused by seasonality or unpaid invoices).
• Investing in new projects and opportunities for growth.
• Covering unexpected expenses, such as damage to equipment or premises.
• Offering available working capital to cover various liabilities in key periods, such as tax bills, payroll and supplier payments. 
• Boosting stock and promotional activity to maximise impact during key seasons and sale periods.
  ‍

Example use case for a business line of credit

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 business finance solution.  

{{business-funding-on-your-terms="/components"}}
‍

‍

Are business lines of credit secured or unsecured?

As with a business loan, you can get both secured and unsecured lines of credit. This means businesses of all kinds and stages of growth can access a line of credit that suits their situation and funding needs. 

A secured business line of credit requires businesses to provide assets as collateral to secure the borrowing amount, reducing lender risk as it gives them a way to recoup the value of the remaining capital owed if the business defaults on repayments. 

Unsecured business lines of credit don’t require commercial assets to be used as collateral, meaning newer businesses or those without many valuable assets for security can access this form of finance. Increased lender risks can mean higher rates, but you’ll typically enjoy faster approvals and greater flexibility.  
‍

Can I get a line of credit as a start-up?

Yes. However, it is harder to get a line of credit as a start-up compared to SMEs and more established businesses, as you don’t have the track record, proven profitability and credit history to satisfy many financial lenders. You’ll have a better chance of approval with an unsecured line of credit, but you’ll still need to present a solid business plan and compelling sales projections. 

This will help satisfy lenders about your future ability to repay the credit offered to you, while the lender will also look at your industry and the market conditions.
‍

Using a line of credit for working capital needs

Business lines of credit are popular forms of financing for working capital needs as the structure of the agreement offers flexibility, cost-effectiveness and ongoing funding support for managing cash flow effectively. 

Having a sum of credit with a clear limit to draw from makes balancing your regular financial commitments, such as payroll, inventory and tax bills, easier and acts as a buffer for urgent asset purchases and upgrades and unexpected costs. 

Using a working capital line of credit is ideal for small businesses, especially in sectors influenced by seasonality, like retail and hospitality, or those with long payment schedules, including construction and manufacturing.
‍

What are the typical line of credit interest rates?

As with most other forms of business loans and credit borrowing, a line of credit is subject to interest on the borrowed amount. Business line of credit interest rates typically range from around 5% to 15%, but the rate you get will depend on the lender and factors such as the amount you want to borrow and your creditworthiness. A secured line of credit should give you access to lower rates. 

One of the benefits of business lines of credit when it comes to interest payments is that you only incur interest on funds you draw down from your agreed limit.
‍

Comparing lines of credit with other business finance options

We’ve outlined the benefits and uses for business lines of credit, and how they work, so now let’s discuss how they compare to other business finance options. Below, we discuss the main differences between a line of credit and other working capital borrowing solutions for growing businesses: 

What are the differences between a business line of credit and a business credit card?

Business lines of credit and business credit cards both provide flexible funding but serve slightly different purposes. Lines of credit typically offer larger amounts at lower interest rates, making them better for planned, significant expenses. Credit cards, with higher rates, are suited for everyday or smaller ongoing costs.

Many credit cards offer perks, like cashback or travel points, while lines of credit are more straightforward, with set repayment terms and renewal periods, unlike credit cards, which stay open as long as payments are made.

How does a business line of credit compare with a business loan?

Business loans and lines of credit differ slightly in structure and how interest is applied. Most loans provide a lump sum for a specific purpose, with fixed repayments and interest, which are predictable but often less flexible.

Lines of credit work more like a credit card in that you borrow funds as needed and pay interest only on what you use. This is ideal for managing cash flow or covering unexpected costs, with credit available again when funds are repaid.
‍

Instalment loans vs business lines of credit 

The key difference between instalment loans and a business line of credit is that instalment loans offer a fixed amount with set monthly payments, while a line of credit lets you borrow as needed and repay flexibly.

Instalment loans usually have fixed interest rates, whereas lines of credit often have variable rates, meaning costs can rise according to market conditions.

Here is a quick visual comparison of the differences between instalment loans and lines of credit:
‍

‍

Merchant cash advances vs business lines of credit

A business line of credit and a merchant cash advance (MCA) both offer fast access to funds, but differ in how fees and repayments work.

A line of credit provides flexible access to funds with interest charged only on what you use, whereas an MCA gives businesses a lump sum in exchange for a percentage of future sales, repaid daily or weekly from card transactions. MCAs don’t charge interest but instead charge a fixed factor rate.
‍

‍Invoice financing vs a business line of credit

A business line of credit and invoice finance both support cash flow needs, but they work in different ways. A line of credit is a broader form of funding, whereas invoice financing is about unlocking working capital tied up in unpaid client invoices.

Solutions, like invoice factoring or invoice discounting, see lenders advancing around 80-90% of invoice values upfront. Once your clients pay, you receive the remainder minus fees, which is ideal for businesses with long payment terms or slow-paying clients.
‍

How to apply for a business line of credit 

If you think a business line of credit might be a good option for your working capital needs, you need to get yourself prepared to apply for one.

Here are the main steps involved in applying for a line of credit:

1. Check your business credit score and credit history – this will help you determine if you’re eligible for a business line of credit.
2. Compare interest rates from different lenders – once you know your credit score, explore what different line of credit lenders are offering and choose one that meets your needs.
3. Check eligibility – you may need to be at a certain growth stage or above a particular turnover threshold, so ensure you meet the criteria outlined by each line of credit lender.
4. Prepare and submit business and financial details – you’ll need to provide personal and financial information, such as your income and debts, along with bank statements and company accounts.
5. Complete the loan application – whether applying online or via phone, you’ll need to follow various steps before lenders will start assessing your business and its viability for funding.
6. 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, you’ll be offered a credit limit, interest rate and repayment terms. Once accepted, you can start drawing money within the limit to use for business purposes.
‍

What are the best lines of credit for small businesses?

Various UK providers offer lines of credit to small businesses, so you need to work out which is most suitable for your requirements. Here are the key steps to go through when choosing the best business line of credit for your company:

• Define your funding needs – be clear about your goals, the purpose of the funds, how you’ll use the credit and how quickly you need access.
• Check eligibility criteria – ensure you’re eligible for the line of credit facilities you’re looking at to avoid wasted time and effort.
• Compare lender rates, terms and funding limits – to judge suitability, you need to weigh up the pros and cons of prospective providers, including rates and fees, the level of flexibility offered, how much you can borrow and any restrictions to consider.
  ‍

Top business line of credit providers

Below, we’ve outlined some of the top business line of credit providers in the UK for you to explore:

• Funding Circle: Different from traditional lines of credit, Funding Circle’s FlexiPay has one flat fee per transaction and enables businesses to spread the repayments over 1, 3, 6, 9 or 12 months. You can get credit limits up to £250,000.
• OakNorth: Aimed at ambitious SMEs, OakNorth’s business loans offer a revolving credit facility, with credit limits starting from £1 million.
• Paragon Bank: For more established businesses, Paragon provides revolving credit facilities from £5 million to £25 million, usually for up to three years, backed by assets and with no fixed repayment schedule.
• Iwoca: Our Flexi-Loan solution works like a line of credit, offering limits of up to £1,000,000 for a wide range of funding needs, from short-term cash flow gaps to financing larger growth opportunities. As with a traditional line of credit, you only pay interest on the funds you use, you can repay early free of charge, with the potential to top up your credit.

Note: Details above are accurate as of July 31, 2025.

There are various other options to explore, from banks and alternative lenders, with different rules and structures, such as lines of credit with a revenue-based repayment model. So, do extensive research to find a business line of credit that best suits your funding needs.
‍

Deciding whether a business line of credit is right for you

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 when needed for measured borrowing. As long as you use it responsibly, you’ll usually have access to that credit line for several years before needing to reapply. 
‍

Is a business line of credit the most flexible source of finance?

Business lines of credit are certainly one of the most flexible forms of finance you can use, as you’re in control of what you draw down and how you use the funds, with the ability to renew the credit limit for ongoing cash flow management. However, some digital lenders in the UK, like iwoca, offer flexible business loans that are tailored to working capital needs and offer a similar level of flexibility. 

iwoca's Flexi-Loans are very similar to a business line of credit, and are great for companies that need access to cash quickly and easily, without requiring heaps of paperwork. You only pay interest for funds you draw down, there are no early repayment charges, and top-ups are available, subject to approval.

Borrow up to £1,000,000 for a few days right up to 60 months and get approved within 24 hours. Find out how to get a business loan from iwoca and try out our handy loan calculator tool.

‍