A business line of credit (LOC) is a type of revolving credit facility that offers flexible access to funds as and when you need them, up to an agreed limit.
You don’t receive a lump sum like with a traditional business loan. Instead, you just draw down the money you need and pay interest only on what you borrow.
Therefore, it can be an efficient way to manage cash flow, cover short-term costs, or take advantage of opportunities without tying up working capital.
How does a revolving line of credit work?
A revolving line of credit allows you to borrow, repay, and borrow again, within your agreed limit.
For example, if you’re approved for a £50,000 line of credit and draw £10,000, you will still have £40,000 available to access. Once you pay back the £10,000, the full £50,000 balance becomes available again.
Is a business line of credit right for you?
A line of credit is a flexible option that can suit a range of financial needs without committing to a lump-sum loan. However, it might not be the right option for everyone.
Your business might benefit from a line of credit if:
- Your income fluctuates month to month, and you need access to funds to support your cash flow
- You consistently face gaps between outgoing payments and incoming revenue
- You want to take advantage of time-sensitive opportunities, like buying stock or launching a marketing campaign
- You’re not sure how much you need to borrow, so you want the flexibility to access only what you need to spend
Lines of credit are ideal for flexibility and covering short-term gaps or seasonal income. However, a business loan may be a better option if you’re planning a significant, one-off investment, like buying new equipment or opening new premises.
The right choice depends on how you plan to use the funds, how often you’ll need them, and how comfortably you can manage repayments.
How much can you borrow with a business LOC?
Typical credit limits for small business lines of credit range from £10,000 to £2 million.
How much your business can borrow will depend on factors like revenue, creditworthiness, and time trading. Lenders will assess your credit record, business activity, and repayment history to set your facility size.
Sole traders and early-stage businesses might be offered smaller limits, while established businesses with regular turnover can access higher amounts.
What are the costs of a line of credit?
The cost of any business financing depends on the lender, your business’s finances, the amount borrowed, and how you use the facility. Understanding the fees involved is essential for managing the cost effectively.
Interest rate
The main cost of an LOC is the interest rate, which can typically range from 7% to 25%. The rate you get will depend on your creditworthiness, trading history, turnover, and whether the facility is secured or unsecured.
Some lenders apply interest daily or weekly instead of monthly, which can increase the total cost if the balance is unpaid. It’s important to repay what you borrow as quickly as possible to minimise the amount of interest accruing over time.
Fees and charges
On top of interest, a revolving credit line may come with several other fees, including:
- Arrangement fees: A one-off cost for opening the facility, usually a flat fee or a percentage of the limit
- Drawdown fees: These are charged each time you access the funds, but most providers do not charge this fee
- Maintenance fees: Regular monthly or annual fees charged to keep the facility open, whether you use it or not
- Late payment fees: These are charged if you miss your repayments, or if you exceed the set credit limit
Use our business loan calculator to help you determine how much a small business line of credit could cost you.
What do you need to get a business line of credit?
To decide if your business can be approved for a loan, Most lenders will want to see that you are trading steadily and can manage repayments. While requirements vary, you’ll typically need:
- At least 6–12 months of trading history
- Regular monthly turnover, often from £5,000 upwards
- A separate business bank account
- A reasonable business credit score
- Financial documents like bank statements or tax returns
If you’re a sole trader or have limited history, you may still be eligible, but the credit limit might be lower and rates slightly higher.
How to apply for a business line of credit
Applying for business finance is usually quick and straightforward, especially with online lenders like Aurora Capital:
- Complete an online application: You’ll be asked for business details, turnover, and how much you want to borrow
- Submit supporting documents: Typically, bank statements from the last 3–6 months and ID verification
- Get a decision: Applications can be processed within 24 hours, with funds often available within 48 hours
- Access your funds: Once approved and the agreement is signed, the funds will be available to access when you need them
Being prepared with the correct paperwork can help speed things up and improve your chances of approval.
You can apply for a business revolving line of credit in minutes with Aurora Capital. You can get a free, no-obligation quote, and applying won’t affect your credit score.
Can you get a business LOC with bad credit?
Getting a line of credit is still possible if you have a poor credit record, but your options may be more limited.
Some lenders will consider you if your business has a low credit score or shows strong cash flow. However, to mitigate the lender’s risk, you may be offered lower credit limits and higher interest rates.
Improving your business credit score over time will help you qualify for better terms when you apply for a credit facility in the future.
How to manage your line of credit
To get the most from a business line of credit and keep the costs at a minimum:
- Only draw what you need
- Clear the balance as soon as you can to reduce interest charges
- Make repayments on time to avoid fees
- Review usage regularly to ensure it remains cost-effective
- Only use it for short-term needs, not long-term debt
When used carefully, a business line of credit can be a flexible and effective way of managing short-term cash flow, handling unexpected expenses, and taking advantage of opportunities, without committing to long-term debt.
