What is a line of credit loan?

What is a line of credit loan?

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What does a line of credit mean?

A line of credit loan allows businesses or individuals to borrow up to a certain limit and then use that money as needed. The borrower will only pay interest on the amount that is borrowed and can repay at any time without penalty. You’d typically use this type of loan for short-term purposes.

Borrowers can also take out more money, up to the limit, regardless of how much they have taken out already. Funds can also be borrowed again once they’ve been repaid.

In a similar way to business credit cards, a line of credit allows borrowers to tap into a pot of funds when they need. The interest rate on a line of credit loan is usually variable, meaning it can change over time.

A line of credit loan is much more common within a business setting than for individuals. This is because a business line of credit usually comes with lower interest rates and higher credit limits than a personal line of credit.

Some of the reasons why businesses might want to acquire a line of credit loan include:

Differences between instalment loans vs line of credit loans

The main difference between instalment loans and line of credit loans is that instalment loans are typically for a fixed amount, while line of credit loans are 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 line of credit).

Alongside this, instalment loans typically have a fixed interest rate, while line of credit loans 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 line of credit.

A line of credit loanInstalment loans
RepaymentsVaries in line with actual borrowingsFixed monthly repayments
Interest rateVariableTypically fixed
Credit limitUsually higherUsually lower
Access to fundsBorrowers can access full or partial amountMust borrow the full amount
Repayment optionsFlexibleUsually fixed over a set period

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How to apply for a line of credit loan

Step 1 - check your business credit score and credit historyThis will help you determine if you’re eligible for a line of credit loan and what interest rate you might qualify for.

Step 2 - compare interest rates from different lendersOnce you know your credit score and have a good idea of the interest rates you might qualify for, it's time to start comparing lenders’ offerings.

Step 3 - complete the loan application formOnce you've found a lender you want to work with, it's time to complete the loan application form. You’ll need to provide personal and financial information, such as your income and debts.

Step 4 - supply the required documentsThe lender will also need certain documents such as bank statements and company accounts to process your loan application.

Step 5 - wait for a decision from the lenderOnce the lender has reviewed your application, they'll decide on whether to approve you for a line of credit loan. If the lender approves you, 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 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 line of credit up to £50k or secured up to £1M, with no monthly capital repayments required.
  • 365 Business Finance:  get a line of credit from £10,000 up to £300,000 in unsecured capital funding.

Is a line of credit loan right for your business?

A business line of credit loan can be a great option for businesses that need access to cash quickly and want the flexibility to borrow and pay back a variable amount. However, not all companies may be eligible or want the variability of a line of credit loan. Eligibility will depend on your business history and how much revenue you are generating - which is sometimes determined using card transactions.

Some lenders also include a fixed commitment period, meaning that you’ll need to draw down the funds within a certain period of time. After this period, your account may be locked and you’ll need to re-apply. So, it’s worth considering how likely you are to use the line of credit and if you’d be better suited to an alternative type of funding such as a business credit card.

Additionally, if your business is not performing as expected, then the lender may retract the line of credit and require you to pay the balance on demand. This could leave you in a tricky situation if you’re dealing with cash flow problems in the future, so it’s important to read the terms and conditions before applying for a line of credit to understand the consequences if things don’t go as expected.

iwoca's Flexi-Loan is very similar to a line of credit, and great for businesses that need access to cash quickly, easily and – it’s in the name – flexibly! You can borrow up to £500,000 over 24 months and get approved in just one working day. You 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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Article updated on:
February 15, 2024

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