Business lines of credit: a guide for small businesses

Access to credit is crucial for growing companies juggling income and outgoings, and accounting for seasonal fluctuations. A business line of credit can be a handy financing option to help you manage cash flow. They’re flexible and cost-efficient, since you only pay interest on what you use.

Does your business struggle with cash flow challenges? Read our business lines of credit guide, which covers how they work, the key benefits, who can qualify and how to apply for one. 

What is a business line of credit?

A business line of credit is a lending solution that lets you draw down capital (up to an agreed limit) as and when required. It’s a popular credit facility for managing cash flow and operational expenditure thanks to its flexibility, ease of use and the fact that you only pay interest on the money you draw down. Less so for large one-off purchases.

You can choose between a revolving line of credit or a fixed-term one, depending on your needs, and some facilities require collateral as security or a personal guarantee.

Revolving or fixed-term lines of credit

In a revolving line of credit, your available credit replenishes as you repay funds, so you can draw down and reuse credit up to your agreed limit. In a fixed-term line of credit, the credit is available for a pre-agreed period, after which the facility may expire. Depending on the agreement, you may need to apply for an extension or new agreement to continue.

Differences between a business line of credit, credit card and overdraft

While business credit cards can be viewed as a revolving line of credit, you use them to make payments at checkout or online. Standard lines of credit let you draw funds as cash or transfer them into your account for business-related purchases/expenses. 

Credit cards also usually have an interest-free grace period, while business lines of credit providers usually charge interest from the moment you draw funds. But lines of credit often give businesses access to larger credit amounts.

Overdrafts are different again. They’re directly tied to your bank account, and you can only access the credit once your balance dips below zero. Plus, you don’t have set repayment windows. You simply incur interest charges (which can be pretty high) for each day spent in a negative balance.

Secured or unsecured

Like with business loans, lines of credit can be secured or unsecured, meaning you may need to use assets as collateral. This can be machinery, property, vehicles, equipment or even inventory, which reduces lender risk and often leads to lower interest rates and better terms. 

Unsecured lines of credit are faster to access as they don’t require business assets, but often come with higher interest rates. However, you may still need to provide a personal guarantee. It is important to seek professional legal advice before undertaking a personal guarantee. 

How a business line of credit works

In simple terms, you’re given a pool of credit (with a pre-agreed limit) to draw from when your business needs to spend money on things like marketing, inventory and equipment repairs/upgrades without draining cash reserves. Or just to pay employees or bills during busy periods or when cash is tight.

Business lines of credit differ from most business loans, which typically provide capital as a lump sum to be repaid in monthly instalments. While you still need to make regular repayments with a line of credit, you can choose to make the minimum repayment, overpay or pay the borrowed amount in full (when it suits your business).  

Example of a business line of credit in action

So, let’s use an example of a retailer:

• It’s approaching Christmas, and the retailer needs to increase marketing spend, boost stock levels and bring in extra staff. They have a revolving line of credit with a £50,000 limit to help them ease cash flow during this key period. 

• The owner decides to draw £20,000 for initial spending ahead of the season to meet increased demand. Later in the period, they drew another £10,000 to ramp up marketing/advertising campaigns while covering regular end-of-month outgoings. 

• This leaves £20,000 of their limit. They pay interest only on the £30,000 they’ve drawn, from the time they accessed the funds, with no interest charges on the rest. They must repay the funds drawn (plus interest) by agreed repayment deadlines. 

• As it’s a revolving line of credit, the credit limit will be topped back up to £50,000 once repayments are made, and they can access some or all of this limit again during a similar period.

Variations from the typical line of credit process 

Funding Circle’s FlexiPay solution works a little differently from the standard line of credit process. You draw down capital from an agreed pool and repay the amount used in instalments of your choice (1, 3, 6, 9 or 12 months). But it’s also unique in that you don’t pay interest. Instead, you pay a flat fee from 1.99% per transaction. Note, 1 month repayment terms may not be available to all accounts. 

You can repay credit in full before the end of your schedule or in instalments (at no cost) to save on future fees, and your credit pool automatically replenishes. Check your eligibility for FlexiPay and find out what credit limit you could receive.

When would you use a line of credit?

Businesses with uneven cash flow tend to favour lines of credit. Especially in industries like retail, where expenditure rises and falls with demand (and during peak, festive seasons), and construction (due to lengthy payment schedules and high upfront costs for tools and materials).

According to a 2026 eCapital report, two in five (39%) SMEs said cash flow problems had stalled their growth in the last 12 months.

Here are some of the most common uses for business lines of credit:

• Dealing with seasonal cash flow dips and stock demand 

• Paying VAT bills, supplier invoices and other bills

• Managing increased staffing needs

• Marketing/advertising (ramping up during peak seasons)

• Paying for tools, materials and equipment ahead of new construction projects

• Covering unexpected costs/expenses

When it might not be suitable

Business lines of credit are less suited to big one-off purchases or large long-term investments. Term loans with set instalment plans and predictable interest payments are often the preferred route for these kinds of funding needs. 

The pros and cons of business lines of credit 

Business lines of credit are particularly useful for small businesses that want a flexible borrowing solution. They help ease cash flow concerns as your business grows. You can dip into the credit pool when you need extra working capital without long-term borrowing commitments. However, it’s useful to understand both the benefits and potential drawbacks.

Here’s an overview of the main pros and cons to consider: 

Advantages

• Flexibility to draw from your credit limit when you choose

• Cost-effectiveness (you’re only charged interest on what you use)

• Fast access to credit to manage cash flow

• Higher borrowing limits than most credit cards

• You can pay back the funds drawn gradually (as long as you make the minimum repayment amount)

• Your credit limit automatically tops back up (in revolving credit lines)

• Builds business credit history

Potential downsides

• Lower credit limits and higher rates than most term loans

• Some lines of credit are secured, which require you to pledge assets as collateral

• Risks of overborrowing, putting business assets at risk (if using a secured option)

Key considerations when looking for a line of credit and comparing providers

What costs to expect

Costs involved depend on the lender and the type of credit line you choose. Here are some of the fees/charges you may need to pay:

• Interest on money drawn down – rates vary widely depending on lender limits, borrower trading history/creditworthiness and whether it’s secured or unsecured (and if it's a revolving credit line) 

• Potential arrangement and maintenance fees (depending on the lender)

• Changes for facility use – some credit line providers charge a flat fee for use, rather than charging interest

• Early repayment charge (some lenders charge a fee for early repayment; others (like Funding Circle) don’t

• Potential asset valuation and security fees (for secured lines of credit) 

Your borrowing costs will vary, depending on the lender and several influencing factors, so do your own research and look for stated fees and any costs hidden in T&Cs or FAQs. 

Learn about Funding Circle’s FlexiPay costs and how our flexible credit line works.

Risks and responsible use

As with any lending facility, there are risks. While a line of credit lets you draw down what you require at any time, lenders often require a minimum amount in their terms. When only drawing down what you need, you can avoid overcommitting and incurring unnecessary interest.

However, be aware of the risks involved with secured lines of credit, where you use business assets as collateral, which the lender can claim if you fail to repay what’s owed, and personal guarantees.

Using business credit lines wisely and responsibly eases cash flow while helping you build your credit history (and improve your credit score). This can lead to greater access to credit in the future.

Eligibility: who can get one?

Lending criteria for business lines of credit in the UK vary, but some providers have explicit qualification requirements based on location, business type, trading history, turnover, creditworthiness, etc. Read the criteria on lender websites and use eligibility checkers, where available, as they use soft searches that don’t impact your credit score.

For Funding Circle’s line of credit, FlexiPay, you need to be a Ltd or LLP registered in the UK to apply. Check your eligibility for FlexiPay to see whether you qualify and what your likely credit limit will be. 

How to apply for a business line of credit

Key steps to applying for a business line of credit in the UK involve deciding what you need, checking your eligibility, choosing your preferred type, and gathering the required information. Lenders will require some or all of the following information:

• Key details about the business (such as location, entity structure and directors)

• Trading history and annual turnover

• Other financials, including bank statements and cash flow forecasts

• Assets to be used as collateral (if using a secured line of credit)

• Credit record (many lenders will review your business credit history, and in certain circumstances, your personal credit file)

If approved, review the limit offered and the costs outlined in your agreement before starting to use the facility. 

With Funding Circle’s FlexiPay solution, the application process is super simple. It takes less than 5 minutes to apply and you get a near-instant decision. 

Comparing lines of credit with other business credit options

So, is a business credit line right for you? It depends on your situation, working capital needs, seasonality, cash flow and growth stage, plus other factors. 

Here are some other credit solutions to consider:

• Business loans: Suitable for a range of short- and long-term funding needs, with fixed and variable interest rates and secured and unsecured options, which require regular monthly repayments.

• Overdrafts: Usually used as a buffer-style, emergency solution to dip into for short periods to cover urgent payments or unexpected costs. 

• Business credit cards: Commonly used to spread the cost of regular operational expenses or purchase new assets, equipment or inventory while building business credit. 

• FlexiPay: A flexible, revolving credit solution that charges a flat fee of 1.99% per use, rather than interest, and acts as your cash flow companion, where you choose the number of instalments you want to repay funds used.  

Learn more in our dedicated article on the difference between a revolving credit line, business overdraft and FlexiPay. 

How Funding Circle can help

FlexiPay is a unique spin on a revolving line of credit, where you repay funds used or drawn over 1, 3, 6, 9 or 12 months, with a flat fee from 1.99% per transaction. It simplifies cash flow management and gives you greater control over how you repay what you borrow. 

We also offer other great lending solutions for small businesses at Funding Circle, including our business loans, shorter-term loans and Cashback business credit card.  

Here’s what you can expect from FlexiPay:

• Credit limits of up to £250,000

• Use the facility as a card or draw and transfer funds into your account

• No interest or forex fees

• Automatic credit limit renewal as you make repayments

• Split costs over 1-12 instalments. Note, 1 month repayment terms may not be available on all accounts. 

• Repay early to waive remaining instalment fees

• Track expenses in the FlexiPay app and get UK-based, human support

Check your eligibility and apply for FlexiPay in minutes without impacting your credit score. 

Business lines of credit FAQs

Is a line of credit the same as an overdraft?

No. An overdraft is a credit overflow tied directly to your bank account and is only accessible when your balance falls below zero. A line of credit is a standalone lending facility, separate from your bank account, in which you can draw funds up to a pre-agreed limit.

With a business line of credit, you usually need to make minimum monthly repayments (including interest accrued on the amount drawn), while overdrafts don’t have monthly repayment dates. Instead, you simply pay interest on the credit balance (normally accrued each day your balance is below zero), and the rates are often much higher than most other credit solutions. Therefore, overdrafts are reserved for very short-term cash flow needs and emergency costs.

Can a line of credit be secured or unsecured?

Yes, a line of credit can be either secured or unsecured depending on the lender’s requirements. Some credit providers offer both options, so your choice depends on what assets you have, their value and if you’re happy to use them as collateral. 

Also, unsecured lines are often faster to access but usually come with higher rates/fees, so again, your choice depends on what matters most to you.

How do I apply for a business line of credit?

Most lenders let you apply for a business line of credit online (or at least start online), and will ask for key business details and often bank statements and other financials. Lenders review applications, considering factors like time in business, cash flow, credit records and asset value (if a secured facility), before deciding whether to approve you and what limit and rates to offer.

If you’re applying for an unsecured line of credit, you need to provide details of the assets you’re committing as collateral, which may need to be valued and can be subject to valuation and security fees.

Disclaimer

20/10/26 While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial, tax or legal advice. Readers should seek independent tax advice from a qualified professional. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.