Business Lines of Credit: How They Work in the UK

You get a pre-approved borrowing limit you can dip into when you need it, repay, and dip into again. You only pay interest on what you actually use, and the headroom comes back when you repay.

You avoid taking out a fresh loan every time your cash flow tightens for a few weeks. We rate it the cleanest tool for a recurring, short-term gap between money in and money out.

What a Business Line of Credit Is

You’re looking at the same product as a revolving credit facility. We use the two terms interchangeably here because UK lenders do, and the marketing copy rarely tells you which one you’re reading.

You’ll see the wording diverge in places. Some lenders reserve “revolving credit facility” for longer, formally documented arrangements of one to three years, and use “line of credit” for shorter, more flexible products.

You get the same job done either way: flexible access to working capital, so you’re not reapplying every time a short gap opens between paying suppliers and being paid.

How a Line of Credit Differs from a Term Loan

You should match the instrument to the shape of the need. A term loan hands you a lump sum and charges interest on the full balance from day one. A line of credit gives you a ceiling and charges interest only on what you draw. That’s the catch.

If you need the money for weeks while your cash flow recovers, not years, a line of credit is almost always cheaper. If you need a large sum for a defined purpose, such as equipment or a fit-out, a term loan is the better fit.

You draw a term loan once and repay on a fixed schedule, with no temptation to keep dipping in. We find that structure does some of the discipline for you.

You should ask one question: do you need money once, or access repeatedly? Recurring need points to a line of credit; a one-off need points to a term loan.

How the Cost Works

You pay interest calculated daily on the drawn balance and charged monthly. Bank lines run 6–15% annualised; fintech and specialist providers sit higher, at 15–40% and more for a thin file, with iwoca’s representative APR near 49%.

You also meet the fees. Most lines carry an arrangement fee of 1–3% of the limit at the outset, and some add a non-utilisation fee of 0.5–1.5% a year on the undrawn portion. We rate that standing charge the line item most owners miss.

Run your own numbers first. Draw £15,000 from a £50,000 line at 12% for six weeks, repay when the big invoice finally clears, and the interest is £210.

The same £15,000 as a 12-month term loan at 10% costs £825, because interest runs on the full balance all term. You win on short, self-liquidating gaps where your cash flow recovers in weeks; a term loan wins when the balance stays high.

What Lenders Look For

You’ll need trading history, and how much depends on the lender. Banks usually want 12–24 months, filed accounts and a business current account, and most bank lines start at £10,000 for limited companies and established sole traders.

You’ll get a faster, lighter route from specialist lenders and fintechs — iwoca, Funding Circle, Tide — which lend from six months’ trading but price for the risk. For a business that can’t yet reach bank rates, that trade can be worth it.

Lenders weigh your cash flow cycle as heavily as a credit score. A business with predictable gaps — a seasonal stock buy each autumn, or a client who pays 30 days late while payroll still lands on Friday — reads as a far stronger applicant.

You should expect a personal guarantee from a director. We rate that the clause to read first, because it puts your own assets behind the facility if the company can’t repay.

Common Ways Lines of Credit Go Wrong

You should treat the limit as emergency headroom your cash flow can lean on, not available cash. That’s the most expensive mistake: a £50,000 line permanently drawn at £45,000 isn’t a line of credit any more. It’s a term loan, priced wrongly.

Your headroom disappears and the interest compounds. If your drawn balance sat at £45,000 in January and is still there in March, you’ve got the wrong product, and switching to a term loan saves on the rate.

You should never fund capital expenditure on a revolving line. A van, a machine or a batch of stock you hold for six months costs far more on a line than on asset finance. We have seen owners fund a van this way and overpay for years.

You can also sleepwalk through the renewal. Most lines run a 12-month term, after which the lender reviews and may reprice; if your revenue has grown, use that leverage rather than rolling over on the old terms.

Lines of Credit vs Overdrafts

You should know which one you actually hold, because they behave differently when you need them most. A committed line of credit is contracted for a set term and can’t be pulled on a whim. A traditional overdraft is usually repayable on demand.

Your bank can reduce or withdraw an on-demand overdraft at short notice, often exactly when your cash flow is already under strain. A committed facility gives you certainty you can plan on. That’s the trap with relying on an overdraft.

You trade convenience for certainty here. Overdrafts sit on the account you already use; lines from specialist lenders give you more headroom and committed access at a higher headline rate. We find the right answer depends on how much certainty your trading needs.

Business Line of Credit FAQs

Methodology and Disclosure