A business line of credit is a credit facility, which means you can withdraw funds whenever you need them. It works a bit like a credit card in that your lender gives you a limit, and you can withdraw cash as and when you need it. Use your line of credit for wages, business premises renovations, managing cash flow (in the short-term), restocking inventory, and more.
You agree with the lender how much you want to borrow, they’ll set out terms and conditions and you’ll sign a credit line agreement. Then, you can then access the money—simple, straightforward finance for UK SMEs.
A business line of credit isn’t the same as your typical business finance loan; you don’t pay it back through fixed monthly payments, as long as you pay back before the date agreed with your lender, you can pay it back whenever is most convenient for you. You can even pay it off early, and you won’t be subject to early repayment charges.
Interest is only charged on the money you’ve drawn down, too, here’s an example:
You receive a business line of credit from a lender for £40,000. That money is now there for you to use however you see fit. You might need to re-stock inventory which costs £3,000. You’ll only be charged interest on the £3,000 you’ve drawn down. But before you’ve even paid off the £3,000, you can withdraw other amounts as you wish until you’ve used up the full £40,000.
As with any business finance product, there are advantages and disadvantages to securing a business line of credit.
You can cover seasonal highs and lows – No matter the state of your business sales, you’ll always be able to pay staff wages. Great peace of mind.
It’s quick to secure – Many lenders will allow you to complete your entire application online, which means lines of credit can be set up quickly.
They’re unsecured – You can get an unsecured line of credit, which means you won’t have to offer up collateral to secure the line of credit.
You can get stuck in a borrowing cycle – You should never depend on a business line of credit as a long-term financial solution.
Fixed credit expiration – Lenders will usually have what’s called a fixed commitment period. That means you have to draw down finances within a certain period. This might not match your business needs.
You’ll need to offer up a personal guarantee – Because some lines of credit aren’t secured with an asset, i.e. your home, you might have to succumb to a personal guarantee, which makes you personally liable for the debt.
There are two types of business credit lines, revolving and non-revolving lines of credit:
A revolving credit facility is when you can use, then reuse the credit for as long as you want (the account will stay open until you or your lender closes it). This kind of credit offers the borrower ultimate flexibility with their money. If you’re a good payer, your lender might even consider increasing your maximum credit limit.
As the title might suggest, a non-revolving line of credit doesn’t revolve. Instead of using and reusing credit, you will only be able to draw down the amount you and your lender have agreed on. Once you’ve used all your money, your account will be closed.
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There are two types of credit lines — secured and unsecured, read more about how they differ below.
A secured line of credit means it’s secured with an asset. Should you not pay your credit back in full, the lender could take your asset as collateral.
An unsecured line of business credit is one that is not secured with collateral. Most lines of credit are unsecured, which means lenders will expect the borrower to provide a personal guarantee. Remember, if you do not pay what you owe, you will become personally liable for the debts.
Suggested reading: What is a personal guarantee — and do you need one?
The main difference between a business loan and a business line of credit is that a business loan isn’t flexible. With a loan, you borrow a lump sum of money in one go, which the lender expects you to repay in fixed monthly instalments. With a line of credit, you can draw down funds as and when required, and the repayment terms are flexible.
You can ordinarily secure a large amount of money with a business loan, and the interest rates will usually be cheaper.
Yes. When you apply for a business line of credit, lenders will be required to credit check you. This will result in a temporary decrease in your score. However, once you start to repay your loan on time, your credit score will increase.
Yes, you can get a business line of credit if you have bad credit. Lenders will take everything into account when assessing your application, not just your credit score. However, you may experience lower loan amounts, shorter terms and higher interest rates.
You can apply for a business line of credit using our business finance comparison tool. As a broker, we’re here to help you find the best line of credit lender in the UK, and we only work with reputable lenders, so you can be confident in our recommendations.