Business Line of Credit for UK Businesses
A business line of credit gives a business access to an agreed funding limit. Depending on the facility, the business draws funds when it needs them and repayments reduce what is outstanding. Where the facility is revolving, repaid amounts may become available to draw again. That continued access depends on the facility remaining in place and its terms being met.
Wize Finance can help your business explore a line of credit and access the appropriate funding referral. Tell us how your cash flow moves and we will discuss whether a credit facility or another structure may suit.
Share how your cash flow moves through the year and the limit you have in mind. The team reviews your enquiry and discusses whether a facility may suit.
What is a business line of credit?
A business line of credit is a facility that gives a company access to an agreed borrowing limit, rather than paying the whole amount out at the start. The business draws what it needs, when it needs it, up to that limit. Where the facility is revolving, borrowing that has been repaid can potentially become available to draw again.
Not every line of credit works this way. Some are non-revolving: once an amount has been drawn and repaid, it cannot be drawn again under the same facility. The agreement sets out which applies.
The key terms:
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Facility limit:
the most the business can have outstanding under the facility at any one time.
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Drawdown:
taking funds from the facility, usually paid into the business bank account.
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Available balance:
the part of the limit not currently drawn, which can still be used subject to the facility’s terms.
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Outstanding balance:
what has been drawn and not yet repaid.
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Repayment:
paying back drawn amounts, in line with the facility’s repayment terms.
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Redraw:
drawing again from availability that repayment has restored, where the facility allows it.
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Review or expiry:
the point at which the provider reviews the facility, or it comes to an end, under the agreement.
Business line of credit or revolving credit facility?
The two terms are often used for similar structures, particularly where funds can be drawn, repaid and redrawn within an agreed limit. Some providers call the same kind of product a line of credit or business credit line, others a revolving credit facility, sometimes shortened to RCF.
“Revolving credit facility” can also describe much larger commercial facilities arranged for bigger companies, which tend to be structured and documented differently.
Whatever a facility is called, check how drawing, repayment, redrawing and review work under its terms.
Product structures vary, so the agreement matters more than the label.
How drawing, repaying and redrawing works
A line of credit works in a cycle: the business draws from its limit, repays, and, where the facility is revolving, can draw again, until the facility is reviewed or comes to an end.
How repayment works depends on the facility. Some structures set a repayment period for each amount drawn. Others work against the total outstanding balance, with repayments made on an agreed basis. In either case, interest or fees typically relate to what is drawn, though some facilities also carry charges for keeping the limit open. The cost section below covers this.
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Agreed facility. The business has an agreed maximum facility limit.
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Draw. The business uses part of the available facility.
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Remaining availability. The unused part remains available, subject to the agreement.
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Repay. The business repays some or all of the drawn amount.
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Availability may be restored. Where the facility is revolving, repayments can increase the amount available again.
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Draw again. Further borrowing may be possible without applying for a completely new loan each time, provided the facility remains available and its conditions continue to be met.
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Review or renewal. The provider may review the facility, change the limit, renew it or bring it to an end in accordance with the agreement.
When a business line of credit may fit
A line of credit can make sense where a business expects to need funding more than once, but does not necessarily know the exact amount or timing in advance. It is the shape of the need that matters, not the sector.
Situations where that shape often appears:
- Recurring operating costs where the gap varies. The business regularly needs to cover costs before income arrives, but the size of the shortfall changes from month to month.
- Uneven supplier payments. Larger supplier bills fall at different points in the year rather than evenly.
- Fluctuating stock purchases. The business buys more stock at some times of year than others.
- Short gaps between paying out and getting paid. Costs are paid weeks before customers settle.
- Contingency. The business wants funding in place for needs it can foresee but cannot size precisely.
- Repeated smaller requirements. Needs that would otherwise mean applying for separate borrowing each time.
When another structure may fit better
A line of credit is built for needs that recur or change. Where the need has a different shape, another structure may suit it better.
If you are starting from why the business needs funding rather than how you want to access it, Working Capital Loans looks at the options by purpose. Working capital describes why the business needs funding; a line of credit describes how access to that funding is structured.
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A defined, one-off requirement. If the business knows exactly what it needs and intends to use the whole amount, a conventional business loan, as compared above, may be the simpler structure.
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A known requirement over a shorter agreed period. If the repayment term is the defining issue, Short-Term Business Loans provide one amount repaid over a short schedule.
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Repayment linked to card takings. If the business takes substantial card payments and wants repayments to move with those takings, a Merchant Cash Advance is structured that way.
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Cash tied up in invoices. If the issue is customers taking time to pay, Invoice Finance releases funds against unpaid invoices.
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Equipment or other identifiable assets. Where the requirement mainly relates to machinery, equipment or vehicles, Asset Finance can use the asset itself to support the funding.
Cost: what to compare
“Interest only on what you use” does not necessarily mean the unused part of a facility costs nothing. Depending on the provider, the cost of a line of credit may include:
- interest on amounts drawn
- a flat fee for each draw instead of interest
- an arrangement or set-up fee
- drawdown fees
- annual or renewal fees
- maintenance fees
- fees on the unused part of the limit
Not every facility carries every one of these.
Early repayment is treated differently from provider to provider as well. Because pricing can be quoted annually, monthly or per draw, a headline rate on its own can mislead. It is more useful to compare the total cost of the way you expect to use the facility.
Before accepting a facility, compare:
- Facility limit
- The amount you expect to draw
- How long you expect to use each amount
- Interest rate or fee
- Whether pricing is quoted annually, monthly or per draw
- How interest is calculated
- Arrangement or set-up fees
- Draw fees
- Renewal or maintenance fees
- Fees on the unused limit
- Repayment requirements
- Facility term
- Review date
- Conditions for redrawing
- Early repayment terms
- Security required
- Personal guarantee required
- What happens to outstanding borrowing when the facility ends
Compare your options
Want to compare your funding options?
How Wize Finance works
Wize Finance uses the information provided to understand the funding requirement and, where appropriate, introduces the business to a funding provider. The funding provider assesses the application and makes the decision.
For a line of credit, it helps to understand not only how much the business may need at first, but also how often it expects to draw funds and how the requirement is likely to change over time.
After you submit your details, the Wize Finance team reviews your enquiry and contacts you to discuss your funding needs and next steps. Where appropriate, your details can then be shared with a suitable funding provider.
- Your company
- Wize Finance introduces the business to a funding provider
- Funding provider assesses the application and makes the decision
Facility reviews and renewal
Reusable does not mean permanently available.
A line of credit commonly runs for an agreed period, and the provider may review it during that time or when it comes up for renewal.
At a review, the provider may look again at how the business is trading and how the facility has been used. Depending on the agreement, the limit could stay the same, be changed, be renewed for a further period, or the facility could come to an end. Unused availability should not be treated as guaranteed indefinitely. If the facility ends, the agreement determines what happens to any amount still outstanding.
A business relying on a line of credit for recurring costs should know:
Different agreements work differently, so these points are worth confirming before the facility is relied on for regular expenditure.
Business line of credit vs business loan
The difference comes down to access versus amount. A line of credit gives access to a limit that the business uses as needed. A conventional business loan provides one agreed amount with a set repayment plan.
| Compared on | Business line of credit | Business loan |
|---|---|---|
| Funding access | Access to an agreed limit | One agreed borrowing amount |
| When funds arrive | The business draws amounts as required, subject to the agreement | The agreed amount is generally advanced at the beginning |
| Reuse | Repaid amounts may become available again where the facility is revolving | Repayment does not normally create a new borrowing limit |
| Interest / pricing | May relate mainly to the amount actually drawn, although facility or other fees may also apply | Applies to the outstanding loan under its agreed repayment structure |
| Repayment | Depends on the facility, and potentially on individual drawdowns | Follows an agreed repayment schedule |
| Best-shaped requirement | Recurring, fluctuating or uncertain funding needs | Defined, one-off expenditure |
| Review | Continued availability may depend on review or renewal | Normally runs until repaid under the agreed loan term |
If the business knows exactly how much it needs and intends to use the full amount from day one, a term business loan may be simpler. Business Loans explains the options. If the requirement changes over time, access to an agreed facility may be more useful. Neither is better or cheaper in every case. It depends on how the funding will actually be used and on the terms offered.
Business line of credit vs business overdraft
A line of credit and a business overdraft can solve similar short-term funding problems. Both give access to an agreed limit that the business can use as needed. They typically differ in who provides them, how funds are accessed, and how pricing and reviews are set.
| Compared on | Business line of credit (typical) | Business overdraft (typical) |
|---|---|---|
| Provider | May be provided by a specialist lender, a bank or another commercial finance provider | Normally linked to the business’s bank current account |
| Access | Funds are drawn through the facility, following the provider’s process | Funds are drawn through the bank account, up to the agreed limit |
| Repayment | The balance can move up and down, depending on the facility’s terms | The balance can move up and down as money goes in and out of the account, depending on the terms |
| Review | May be reviewed under the agreement | May be reviewed by the bank |
| Pricing | May involve interest and fees; the structure varies by provider | May involve interest and fees; the structure varies by bank |
| Security / PG | May involve security or a guarantee, depending on the product and provider | May involve security or a guarantee, depending on the product and bank |
Neither is better in every case. The choice depends on the facility structure, the provider, how funds are accessed, what it costs, and the review terms in each agreement.
What providers may assess
Providers look at whether the business can support the facility. Criteria differ between providers, but they may consider:
Because a business may be able to draw up to the full agreed limit, a provider may assess whether the business could support the facility as a whole, not only the amount it expects to use initially. That is one way a line of credit application can differ from a loan application, where the amount being assessed is fixed.
- turnover and revenue
- cash flow and business bank activity
- filed or management accounts
- profitability
- how long the business has been trading
- existing borrowing
- the business’s and directors’ credit profile
- the facility limit requested
- how much of the facility the business is likely to use
- what the funding is for
Security and personal guarantees
A line of credit can involve three separate kinds of protection for the provider. Requirements depend on the provider and the facility.
Check which, if any, of these the agreement requires.
Specific asset security:
some facilities may be secured against specified assets, such as property or equipment.
Company security:
some may involve broader security over the company’s assets.
Personal guarantee:
some providers may ask directors for a personal guarantee. This is separate from any security the company gives, and directors should understand what it covers before agreeing to it.
Advantages and disadvantages
Whether these apply depends on the provider and the facility.
Potential advantages
- The business can draw only what it needs
- Repaid borrowing may become available again where the facility is revolving
- Can suit recurring or fluctuating requirements
- May avoid taking the full amount before it is required
- Pricing may apply mainly to drawn funds, depending on the provider
Potential disadvantages
- Continued availability depends on the facility remaining in place
- Facility or renewal fees may apply
- Fees on the unused limit may apply
- Easy access can encourage repeated dependence on borrowing
- Security or a personal guarantee may be required
- Not always suitable for long-term capital investment
Business line of credit FAQs
Do I pay anything if I don’t use a business line of credit?
Possibly. Some facilities charge no interest on funds that have not been drawn, but other costs may still apply, such as arrangement, renewal or facility fees, or a fee on the unused part of the limit. Check the agreement to see what is charged while the facility is open but unused.
How long do I have to repay what I draw?
It depends on the facility. Some set a repayment period for each amount drawn, while others work against the total outstanding balance with repayments made on an agreed basis. The agreement sets out what applies.
Can a provider reduce or end a line of credit?
Potentially, depending on the agreement and its review terms. Facilities commonly run for an agreed period and may be reviewed, so the limit could change or the facility could end at review or renewal. How and when this can happen differs between agreements.
Is it difficult to get a business line of credit?
It depends on the provider’s assessment of the business. That includes its trading and financial position, the limit requested, existing borrowing and the provider’s own criteria. Because the business may be able to draw the full limit, the provider may look at whether the business could support the whole facility. Telling us the limit you have in mind and how you expect to use it helps us discuss whether a facility is likely to suit.
What’s the difference between a line of credit and a business credit card?
Both involve an agreed limit, but they work differently. A business credit card is a payment card with a credit limit, used to pay for purchases. A line of credit is a funding facility from which money is drawn, usually into the business bank account, and then used for business payments.
Will directors need to give a personal guarantee?
Some providers require one and others may not. Where a personal guarantee is requested, what it covers varies, so directors should be clear on its scope before agreeing to it.
Can I repay early?
That depends on the provider and the facility, so check the terms. In a revolving facility, repaying drawn amounts early may also restore the available balance sooner.
Can a business have both a line of credit and a business loan?
It is possible in principle. Existing borrowing affects affordability, though, so a provider will usually take any current loans or facilities into account when assessing a new one.
Does your funding requirement change from month to month?
Tell us:
- roughly how much access you think the business needs
- what the funding is for
- whether the requirement is one-off or recurring
Where appropriate, Wize Finance can introduce the business to a funding provider.