Business lines of credit are currently offered through the UK government’s Coronavirus Business Interruption Loan Scheme (CBILS). Businesses looking to secure a line of credit may first want to consider contacting one of the scheme’s accredited lenders in order to get finance.
A business line of credit allows you to borrow money as and when you need to, up to an agreed limit and only pay interest on your outstanding balance and the days on which you borrow.
Many business owners will find this form of credit more flexible than a business loan, plus you’ll usually be offered a higher credit limit than with a credit card.
In this guide, you’ll learn whether a business line of credit is right for your company, how to find the best deal and what you’ll need to do to be approved.
Different business credit lines work differently, but the basic premise is a similar to a credit card or overdraft. You borrow what you need, when you need it, only pay interest on the amount borrowed for the days on which you were borrowing, then pay the money back as and when it suits you (subject to a minimum monthly repayment).
Once you’ve successfully applied for a line of credit, it’s there and available to dip into until you close your account.
Lenders may require you to secure your credit with collateral and it’s also possible that you’ll be charged administration fees on top of your interest payments.
While some products have specific “draw periods”, during which you can spend money from your line of credit, followed by “repayment periods”, most products allow you to access the funds whenever you need to (subject to your credit limit). This means it’s usually possible to “top up” your borrowing whenever you like – even if you’re still paying off earlier borrowing.
A business line of credit is handy for businesses that frequently need access to additional finance, perhaps due to unpredictable cashflow issues or a lack of capital.
It’s often used to fund sporadic operational expenses or emergency purchases, rather than large one-off payments (which can be planned for in advance). It could also work well as a means of working capital during the off-season for cyclical businesses. If you’re planning to make a large purchase to launch or scale your business, it will usually work out cheaper and easier to obtain a business loan.
Many business line of credit lenders will only consider applications once you’ve been in business for at least one year. Factors including your business credit score and annual revenue figures will be used to consider your eligibility.
If you currently use a business overdraft but aren’t happy with it, a line of credit could be a decent alternative.
Here are some questions you can ask to compare your options:
Business loans tend to be better for large one-off purchases and are available to a wider range of businesses. A business line of credit can be more suitable if you anticipate making multiple purchases at different times.
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Business credit cards tend to offer better borrowing terms, but you can typically borrow a lot more with a business line of credit.
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You can apply for a business line of credit reasonably quickly via the lender’s website.
You will be asked to provide some personal information, as well as basic details about your business, such as the company type, business address and limited company number.
You’ll also need to provide financial details, including VAT returns, bank statements and assets that can be offered as collateral. You may also be asked the reason you’re applying for a line of credit.
Some lenders will make an instant decision on the success of your application. Others will email you a decision within two to three business days. If your line of credit has been approved, it’s common to be able to access funds on the same business day.
Secured lines of credit are backed by collateral. These deals are less of a risk for the lender, so will often come with lower interest rates, although you run the risk of losing your assets if you fail to repay your loan.
Some lenders may offer both secured and unsecured lines of credit, although the latter may come with a higher interest rate and closer scrutiny in order to get approved.
Business line of credit lenders will use credit reference agencies to determine your eligibility for their products.
These agencies will calculate your business credit score based on information in your business credit file. This file contains details of your previous credit applications, borrowing history, current debt, debt payment history and the number of years you’ve been in business.
The higher your business credit score, the more likely you’ll be approved for the best line of credit deals. You can check your business credit score by contacting credit reference agencies, such as Equifax, TransUnion and Experian.
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