What is a business line of credit and how do I open one?
Are you looking for flexible, short-term business finance? If so then a business line of credit or a flexi-loan could be a great option. It allows you to access money as needed up to an agreed limit and repay the loan with no penalties.
In this guide we explain how a business line of credit works and the pros and cons of using one. We also answer common questions like “should I use a business line of credit or get a longer term loan?” and “can I get a business line of credit if I have bad credit?”
Table of Contents
- What is a business line of credit?
- What are the pros & cons of using a business line of credit?
- How do I get a business line of credit?
- Frequently asked questions?
What is a business line of credit?
A business line of credit is sometimes called a revolving credit facility or a flexi-loan. It's a type of flexible short term finance where businesses can quickly withdraw money and repay it when they want to up to an agreed limit. Like a bank overdraft, you will only pay interest on the outstanding balance.
Most lenders offer business lines of credit for up to a year and they will need to be repaid in full or renewed at the end of the agreement period.
Key features:
- Includes secured and unsecured lending
- Popular with businesses that want to improve their cash flow or working capital
- Interest is only charged on the outstanding balance
- Need to repay balance at the end of the loan agreement
How does a business line of credit work?
How a business line of credit works depends on the type of loan arrangement. Most lenders provide a maximum borrowing amount over a certain period, often 12 months. During the loan period, you can draw down funds and repay them as needed on an interest-only basis. Most lenders require businesses to pay the outstanding loan balance in full at the end of the year.
Revolving and non-revolving credit facilities work slightly differently. A revolving business line of credit works like a flexible loan. You can borrow money and pay it back as many times as you want over the period of the loan and up to an agreed limit. It’s called revolving because once you’ve repaid the loan you can withdraw more as needed, up to your credit limit. A non-revolving business line of credit allows businesses to borrow money up to an agreed loan value. This limit works more like a quota or allowance and you will use up some of your limit each time you borrow money.
What is a business line of credit for?
A business line of credit is usually used to meet short-term borrowing needs. Here are some common uses for a business line of credit:
- Improving cash flow - many new and existing businesses struggle with cash flow problems and a business line of credit can help with this.
- Financing seasonal fluctuations in business - businesses can borrow to pay for stock needed for a busy period and repay the loan once they receive sales.
- Paying for temporary staff - businesses can pay for temporary staff needed over Christmas or for a busy period.
- Business expansion - expanding businesses often use a business credit line to pay for hiring new staff, buying stock or funding new premises.
Should I use a business line of credit or get a longer term loan?
If you need finance for your business then it’s important to think about which type of finance is most suitable. You should look at a variety of factors such as the affordability of loan repayments. Short term loans like a business line of credit are more expensive in the short term as they need to be repaid more quickly.
Also consider if you have a realistic repayment strategy or an alternative source of funding at the end of the loan period. It can take some time for a new business to become profitable and it is easy to overestimate how much money you will have available in 12 months. If you think it’s possible that you may not be able to repay the loan in 12 months then a longer term loan may be more suitable.
What are the pros and cons of a business line of credit?
The pros and cons of a business line of credit vary depending on if the agreement is revolving or non-revolving, secured or unsecured. Here are the main pros and cons of a revolving, secured business line of credit:
Pros
- Flexible - a revolving business line of credit is extremely flexible as you can borrow and repay any amount up to the agreed credit limit.
- Fast application process - most lenders will make a quick lending decision.
- Improved cash flow - having a flexible loan facility means that you can cover periods where there are cash flow problems. For example, you can borrow cash to buy stock and then repay the loan once sales come through.
- No early repayment fees - lenders won’t charge early repayment fees on any repayments made.
- Only pay interest on what you use - you will only pay interest on the outstanding balance. This may make the loan cheaper if you only need to borrow cash for a short period.
Cons
- Expensive - lenders often charge higher interest rates on a business line of credit than for other types of short term business loan.
- Good credit history needed - most lenders won’t consider businesses with a poor credit history or that are loss making.
- Not for new businesses - many lenders only accept businesses that have been trading for over 12 months.
- Secured on business or personal assets - if you take out a secured business line of credit then your assets will be at risk if you don’t keep up repayments.
- May require personal guarantee - this means you will have personal responsibility for repaying the loan if your business fails.
- Needs to be repaid each year - many lenders require borrowers to repay the balance of the loan each year.
Different types of business line of credit
There are several different types of business line of credit, including the following:
- Secured business line of credit - this is secured on either business or personal assets.
- Unsecured business line of credit - an unsecured facility may not be available to smaller or newer businesses.
- Business credit card - this works like a personal credit card with interest charged monthly on the outstanding balance.
- Revolving line of credit - allows you to keep drawing down money up to your credit limit and once it’s repaid your balance tops up again and you can borrow more money from the same account.
- Non-revolving line of credit - allows you to draw down money up to your credit limit but once you’ve used your quota, you can’t borrow more money.
Alternatives to business line of credit
There are several other short-term finance options available if you don’t want to use a business line of credit. They include the following:
- Asset finance - asset finance is secured on a purchased or leased asset and paid off gradually over the useful life of the asset.
- Invoice finance - this is where businesses raise finance against the value of their invoice book.
- Merchant cash advance - lenders advance in exchange for a percentage of the money received from card payments.
- Short term business loan - this is a simple term business loan over 12 to 18 months.
- Government loan - various government loans are available including the Government Recovery Loan Scheme
How do I get a business line of credit?
The application process for a business line of credit depends on the lender and the type of loan agreement. Lenders will carry out a personal or business credit check ask for the following information:
- Personal details and photo ID
- Details of your business
- Financial reports and recent bank statements
- Details of how much you want to borrow and the loan period
- Information on how you plan to use the loan
Where to get a business line of credit
| Lender | Loan period | Loan amount | Typical rates | Minimum turnover | Other info |
|---|---|---|---|---|---|
| Fundingxchange | Up to 5 years | Up to £250,000 | 10-25% APR | £100,000 | Minimum trading period 2 years |
| Iwoca | Up to 12 months | Up to £200,000 | Varies | £50,000 | Ltd companies only |
| Marketfinance | Up to 12 months | Up to £50,000 | Varies | £50,000 | Minimum trading period 12 months |
| Smeloans | Up to 2 years | Varies | Varies | ||
| Spotcap | Varies | Varies | Varies | £500,000 | |
| Swoopfunding | Varies | Varies | Varies | Minimum trading period 3 months |
Frequently asked questions
How much you can borrow using a business line of credit varies between £1,000 to £10 million depending on the lender and your financial circumstances.
A business line of credit is a type of working capital loan. A working capital loan is an umbrella term covering business credit lines, merchant cash advances and other types of short-term loan.
A business line of credit varies in cost depending on the lender and the terms of your agreement. Interest rates tend to be more expensive than most other types of business finance. You may also need to pay arrangement fees and monthly fees.
Like any type of finance, using a business line of credit will affect your credit score if you default on the loan.
Many lenders offer unsecured business lines of credit, although these may not be available for new businesses or businesses with a small turnover.
You may be able to get a business line of credit if your business has a bad credit record. Lenders may charge higher interest rates and require a personal guarantee.
Many lenders require a personal guarantee for a business line of credit.
Most lenders only offer a business line of credit to established businesses with over a year of trading history.