Line of Credit

A flexible line of credit means your business can draw down your loan as and when you need it.

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Written by Simon Moorcroft | Reviewed by Jamie Moorcroft | Updated: December 05, 2023

What is a flexible line of credit (LOC)?

A line of credit, also known as a flexible financing line (FFL) is finance solution that a business can use to access funds up to a predetermined credit limit. It’s essentially revolving credit, similar to a business credit card, that can be used to cover short-term cash flow needs or unexpected expenses.

You can use your line of credit for wages, business premises renovations, restocking inventory, and more.

Lines on a running track

How does a flexible line of credit work?

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.

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What are the advantages and disadvantages of a line of credit?

As with any business finance product, there are advantages and disadvantages to securing a business line of credit.

The advantages of a 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.

The disadvantages of a 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.

What are the different types of business credit lines?

There are two types of business credit lines, revolving and non-revolving lines of credit:

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.

Non-Revolving Lines of Credit

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.

What is the difference between secured and unsecured credit lines?

There are two types of credit lines — secured and unsecured, read more about how they differ below.

Secured business line of credit

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.

Unsecured business line of credit

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?

What is the difference between a business line of credit and a business loan?

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.

Start your search for business funding
Check your eligibility for business funding

Checking won’t affect your credit score

Will a business line of credit affect my credit score?

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.

Can I get a business line of credit with bad credit?

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.

Did you know? Increasing your credit score before applying will increase your chances of being accepted and result in better rates. Read our guide on how to improve your business credit score for free here

How do I apply for a business line of credit?

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. Get started today.

About the author

Simon Moorcroft
Written by Simon Moorcroft

Money Writer, Director and Co-Founder

Simon has over twelve years of experience in consumer and business finance. Simon is a Co-Founder and Director at Capalona and heads up the technology team, who utilises the latest technology to assist our customers in finding fast finance.

Updated: December 05, 2023
Published: February 16, 2021
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