A business line of credit is a limit a lender agrees with you in advance, which you can draw on in whole or in part as cash flow requires. You pay interest only on the amount you have drawn, not on the whole limit. On a revolving facility, anything you repay becomes available again without a new application. It suits short-term gaps, such as a late-paying customer, seasonal stock or an unexpected repair. It is the wrong tool for a large, long-term purchase.
Key Takeaways
- You are approved for a limit, not handed a lump sum. Interest runs only on the part you use, and only while you use it.
- Revolving lines refill as you repay. Some lines are non-revolving or have a fixed end date, after which you must reapply, so check which you are getting.
- Rates commonly run from around 5% to 15%, depending on the lender, the amount and your credit standing. Secured lines should be cheaper than unsecured ones.
- Rates are usually variable, so the cost can rise during the life of the facility.
- Lenders look hard at your accounts, bank statements and credit history. Applying while the business looks healthy gets better terms than applying in a crunch.
- It is a cash flow tool. If you are funding equipment, premises or a hiring push, a term loan usually fits better.
How a line of credit works in practice
The lender assesses the business, sets a credit limit and makes the funds available. You then draw from that limit as you need it. Most lenders give you an online dashboard or app, and you move money into your business bank account from there. You do not have to draw the full amount, and you can draw in several smaller amounts up to the total agreed.
Repayment depends on the agreement. Many lenders ask for monthly repayments made up of interest plus a slice of the principal. Others allow interest-only payments with the balance due at the end of the term. Terms vary by lender and by facility, so read the repayment clause before you sign rather than assuming.
The cycle looks like this:
- The lender approves a limit, say £50,000.
- You draw £10,000 to cover a gap.
- You pay interest on that £10,000 until it is repaid.
- As you repay, the available credit is restored if the facility is revolving, and you can draw again without reapplying.
If you have used it responsibly and repaid promptly, you can ask the lender to raise the limit. That is a request, not an entitlement.
Revolving, non-revolving and fixed-term
These are different structures, and the label "line of credit" is used for all of them.
| Type | How it behaves |
|---|---|
| Revolving | Draw, repay and draw again within the limit, without reapplying |
| Non-revolving | Use the funds once; once repaid, the facility ends. Closer to a flexible loan, often used for one-off purchases |
| Fixed-term | Available for an agreed period. At the end you reapply if you want continued access, even if you never drew on it |
A revolving line can still have an expiry date. Ask the lender how long the facility runs and what happens at the end. Lines are usually granted for several years before a review, but that is a pattern, not a promise.
What it costs: a worked example
The appeal is simple: you pay for what you use. Take a £50,000 limit with £10,000 drawn. I will use an illustrative 10% a year. That sits inside the 5% to 15% range commonly seen, but it is not a quote from any lender.
- Interest on the £10,000 drawn: £10,000 × 10% = £1,000 a year, about £83 a month.
- If you hold it for 30 days only: £10,000 × 10% × 30 ÷ 365 = about £82.
- If you were charged on the full limit instead: £50,000 × 10% = £5,000 a year. You are not, which is the point of the product.
Now the uncomfortable part. Rates on lines of credit are usually variable. If the rate in this example moved from 10% to 12%, the same £10,000 held for a year would cost £1,200 instead of £1,000, an extra £200. Over a longer period or a larger balance, that matters.
The cheapest way to use a line is to draw, cover the gap, and repay as soon as the customer pays. The most expensive way is to treat it as permanent working capital. A balance that never falls to zero is a loan with a variable rate and a lender who can review it.
Fees, limits and terms
Interest is only part of the cost. Fees vary by lender and facility, so ask for the all-in cost in writing, including any arrangement, renewal or over-limit charges, before you commit. Compare lenders on total cost, not headline rate.
What we can say with confidence about terms:
- Early repayment. Lines of credit are generally described as allowing early repayment without early repayment fees. Confirm that in your agreement, as it is not a universal rule. The British Business Bank lists this among the advantages of the product.
- Going over the limit. This can bring fees, a higher rate, or the line being frozen.
- Changes by the lender. Some lenders can change terms, reduce your limit or call in the line at short notice. Read the clause that allows this, because it is exactly when you most need the money that it bites.
- Missed repayments. These can damage your company's credit rating.
Limits depend on your creditworthiness, financial stability and, where it is secured, the value of the collateral. Higher limits generally need stronger financials and sometimes security.
Providers in the market sit at very different scales. As at July 2025, iwoca's business loan, which works like a line of credit, offered limits up to £1,000,000 and free early repayment. Funding Circle's FlexiPay offered limits up to £250,000, with one flat fee per transaction and repayment spread over 1, 3, 6, 9 or 12 months. OakNorth's revolving facilities started from £1 million, and Paragon Bank's ran from £5 million to £25 million, usually for up to three years, backed by assets and with no fixed repayment schedule. Most owner-managed businesses will be looking at the smaller end. The larger facilities are for well-established companies with substantial balance sheets.
Note also that FlexiPay's flat fee per transaction is a different pricing model from interest on a drawn balance. If a product charges a flat fee, work out the equivalent annual cost for the repayment period you would actually use, so you can compare it with an interest-based line.
Secured or unsecured
A secured line is backed by assets, such as property, vehicles or stock. If you cannot repay, the lender can claim them. In exchange, interest rates tend to be lower and limits can be higher.
An unsecured line needs no collateral. That suits newer businesses and those without much to pledge, and it generally speeds up the application. The price is a lower limit and a rate that may be higher, because the lender carries more risk.
| Secured | Unsecured | |
|---|---|---|
| Collateral | Yes, business or other high-value assets | No |
| Typical rate | Lower | Higher |
| Typical limit | Higher | Lower |
| Speed | Usually slower, as security must be assessed | Usually faster |
| Risk to you | Assets can be claimed on default | No named asset at risk |
Before you pledge anything, ask exactly which assets are covered and what else the lender can look to if you default. Some lenders also ask for personal support from directors. The detail varies by lender, so ask early rather than finding out at the offer stage.
Line of credit, overdraft and term loan
The three products solve different problems.
| Line of credit | Term loan | |
|---|---|---|
| Access to funds | Draw as needed, up to the limit | Lump sum upfront |
| Interest | On the amount drawn | On the whole amount borrowed |
| Repayments | Vary with what you have borrowed | Fixed, regular payments over a set period |
| Rate | Often variable | Typically fixed |
| Typical use | Cash flow gaps, smaller purchases | Larger, longer-term investments |
A line of credit often costs more per pound borrowed than a bank loan, because you are paying for flexibility. A term loan is generally the better fit for something like fitting out premises or buying equipment, where you know the amount and the repayment profile in advance. A line of credit is better for smaller purchases when cash is tight.
Against a business credit card, a line of credit generally offers larger amounts at lower rates, and cards tend to carry higher rates and fees. Cards suit everyday spending; a line suits planned, bigger expenses.
An overdraft is the closest relative. You can dip into a line of credit in a similar way to an overdraft, so long as you stay inside the limit. How an overdraft is priced, secured and reviewed depends on your bank and your account terms, so compare the actual terms side by side. We cover that decision in business overdraft or loan.
If your real problem is money tied up in unpaid invoices, other finance fits more directly. Invoice finance typically advances around 80% to 90% of an invoice's value upfront, with the rest paid, less fees, when your customer pays. A merchant cash advance works differently again: a lump sum in exchange for a percentage of future sales, repaid daily or weekly from card transactions, with a fixed factor rate rather than interest. If your sales vary, revenue-based finance is worth understanding before you choose.
Who gets approved, and what lenders check
Lenders are trying to answer one question: how likely is this business to repay, and how much risk does the facility carry. Typically they look at:
- your business credit report, drawn from credit reference agencies
- your credit utilisation, meaning the share of your available credit you are already using
- annual revenue and balance sheets
- existing debts and obligations
- checks on directors or partners, your company's credit rating and what you have filed at Companies House
Expect to provide:
- your latest filed company accounts
- at least six months of business bank statements
- evidence of revenue, transactions, equity and cash flow
- a business plan or financial statements, and a cash flow forecast
- your business credit report and payment history
- details of any outstanding debt
There is no magic credit score. As a rule, sole traders and very small businesses are assessed more on personal credit and personal finances. Limited companies with a longer history are assessed on the company's own credit record. In both cases, at least a good rating is usually expected.
Start-ups can get lines of credit, but it is harder. Without a track record, proven profitability or credit history, you will usually need a solid business plan and credible sales projections, and the lender will look at your industry and market conditions. Some lenders will consider a newer business where the director has a good credit record or the business account shows consistent income. A common minimum is one to two years of trading, though that varies by lender.
The practical advice is to apply before you need the money. A business with healthy turnover and cash flow is more likely to be approved, and on better terms. Applying in the middle of a cash shortage tends to produce a smaller limit, a higher rate or a decline. Decision times vary: some lenders decide within 24 hours, and online lenders can approve in as little as 48 hours. High street banks usually take longer and ask for more paperwork.
When a line of credit fits, and when it does not
It fits when:
- customers pay late and you still have wages and suppliers to cover
- your trade is seasonal and you need stock ahead of the busy period
- you want a cushion for unexpected costs, such as equipment failure
- you need to move quickly on a time-limited purchase
- you expect to repay within weeks or a few months
Sectors with seasonal demand, like retail and hospitality, and those with long payment cycles, like construction and manufacturing, tend to be the natural users.
It does not fit when:
- you are buying equipment, expanding premises or funding a major hiring phase, where a lump sum and fixed repayments are easier to plan around
- the borrowing is really a permanent shortfall in working capital
- you are already close to your limits elsewhere
- you would struggle to resist drawing on it: easy access is the product's strength and its main hazard
The pattern we see in poorly run facilities is simple. The line is drawn to cover ongoing costs, the balance never clears, the variable rate rises, and the business is left with debt it can service but not reduce. Use the line for gaps with a clear way out, and fix the underlying cash flow problem separately. Our guide on how to improve cash flow covers that side.
Frequently Asked Questions
Do I pay interest on the whole limit?
No. Interest applies only to the amount you have drawn, and only until it is repaid. Check for any separate fees in the agreement.
Can I repay early?
Generally yes, and lines of credit are often described as carrying no early repayment fees. Confirm this in your own agreement.
Is a line of credit cheaper than a loan?
Not usually per pound borrowed. You are paying for flexibility, and rates are often variable. It can still cost less overall if you borrow small amounts for short periods.
Can a start-up get one?
Sometimes, but it is harder. Expect to rely on a strong business plan, sales projections and the director's personal credit record. An unsecured line gives a better chance than a secured one for a business with few assets.
How much could I borrow?
That depends on your accounts, credit history and any security. Our how much can I borrow tool gives a starting point.
If you are weighing a line of credit against other facilities, Deplexifi UK can compare funders against your accounts and show you the all-in cost of each before you apply.
A line of credit is cheap only while the balance clears. If it never reaches zero, you are carrying a variable-rate loan the lender can review.