Business line of credit

In the third quarter of 2023, a fifth of businesses used credit card financing. This demonstrated an 8% increase on the first quarter of the same year. With this increased interest in business credit cards, we think now is a good time to talk about the credit card’s slightly lesser known sister—business lines of credit.

What is a business line of credit?

A business line of credit is similar to a credit card in that you have an agreed sum from which you can draw, and you then return the full withdrawn amount within an agreed period (often a month). Some lines of credit are revolving, in that they can be reused and recycled over and over, replenishing each time the borrower returns the funds. However, not all lines of credit are revolving—some come with end dates.

Interest is usually charged on the borrowed amount, rather than the full available amount, and often goes up if the repayment deadline is missed.

While business credit cards are usually connected to a payment card or online account that can be used to make purchases, lines of credit can come in cash, cheque, or card payment form, making them a more suitable option over credit cards when it comes to payroll assistance or paying suppliers. 

Also, while most credit cards are unsecured, meaning no assets are used as collateral for the loan, lines of credit are often secured, meaning the borrower has put up some form of security to gain access to the funds.

What can I use a business line of credit for?

Business lines of credit are designed to assist with a range of business activities, including:

Cash flow management

Lines of credit can help assist with cash flow by enabling you to meet short term payment obligations while awaiting further funding.

Onboarding staff

Sometimes, you might have to onboard staff a month (or several months) before the associated client pays their invoice. In this instance, a business line of credit could help you run payroll while you await any payments.

Growth initiatives

A business line of credit could be used to fund marketing, sales, or business development projects.

Purchase stock

Short sales cycles could make purchasing inventory, with the intention of selling on the stock for a profit before the payment date, a suitable use of a business line of credit.

Emergency costs

From an unexpected electricity bill to a broken piece of equipment, emergency costs can hit any business. Having a business line of credit available can help you feel more prepared if you are hit with a surprise of this nature.

The benefits of using a business line of credit

There are many pros to lines of credit, including:

Ease of access

Once the approval process has been completed, eligible borrowers may be able to draw from the funds more than once, as and when they’re needed, making this a helpful form of funding for any businesses looking for flexibility.

Lower interest (maybe!)

Compared to a similar form of funding, like business credit cards, a line of credit could come with a lower interest rate, as well as a potentially higher limit.

Flexible withdrawals

Unlike credit cards, many lines of credit are cash based, meaning a bank transfer could be made directly to your debit account, making the use of a line of credit more flexible in its nature over a business credit card, which often is tied to a card payment.

Peace of mind

For borrowers with high levels of financial control, having a line of credit that is left fairly unused can provide peace of mind as the borrower knows they’re able to withdraw funds if an emergency ever does come along. 

Let’s say, for instance, a major sale is about to go through, but something urgent needs to be paid for first, such as the repair of an essential piece of machinery that is vital to the deal. Having a line of credit open and available could help smooth out any issues like these without the borrower having to search and apply for new loans.

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Some of the drawbacks and risks

There are also some drawbacks and risks to be aware of, including:

Higher interest rates

But we said the opposite before, what happened? While lines of credit can come with lower interest rates than, say, a credit card, they often come with higher interest rates than a standard long term business loan. 

This is because the reduced amount of time available to make the payment makes it more likely a borrower may miss a payment (and even default), costing the lender money.

Debt cycle

Ease of access and flexibility can be great, but they can also be debt enablers, trapping users in a constant cycle of use, replenish, use. This can even lead to debts being taken out with other lenders to repay historic debts, furthering the cycle. If you struggle with debt, a line of credit may not be a suitable option.

Short term

Lines of credit are not designed for long term use. The funds are meant to be returned fairly quickly. This can be great for any businesses looking for quick funding, but it can become a problem if your business needs more long term funding for larger projects, since the costs can spiral out of control.

How can I get a business line of credit?

Consider first if a line of credit is what you’re looking for. Ask yourself:

• Can I manage a line of credit? Borrowers need to be highly aware of when repayment is due, credit limits, and their own ability to control debt.

• Do I need short term or long term funding? Lines of credit are more suitable for short term funding.

• Do I want to reuse the credit over and over? If so, a revolving credit facility may be suitable.

Then, find a lender. We may be able to help you there. We connect eligible borrowers to established lenders. Get a quote here.

Once you’ve compared your options by looking at a range of markers, such as interest rates and reputation, select the lender you like the most and submit an application. This is often done online. Lenders may ask to see cash flow projections and will likely run a credit check.

Find a business line of credit

We work to connect eligible borrowers to our network of over 120 lenders offering between £1000 and £20M. If you’re looking for a business line of credit, just hit the link below, submit your details, and if you’re eligible, we’ll aim to get back to you with a match.

Find a business line of credit.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.