What is a business line of credit? Your complete guide

Running a business can sometimes feel like walking a tightrope—especially when cash flow is tight. Every step needs to balance money coming in with what’s going out. That’s where a business line of credit can help. Whether you're waiting on a late payment, covering an urgent repair or dealing with unexpected costs, having flexible access to funds keeps you steady.

A business line of credit gives you access to money when you need it, without the commitment of a full-blown loan. It’s there to bridge short-term gaps, support new projects or give financial breathing space when things get tight.

In this article, we’ll explain exactly what a business line of credit is, how it works and how it compares to other types of finance. We’ll also explain what you need to qualify and what to watch out for before applying. 

This article is for general information purposes only and does not constitute financial advice.

What is a business line of credit?

A business line of credit is a type of flexible borrowing that lets you access money up to a pre-agreed limit, as and when you need it. Unlike a traditional loan, you’re not given a lump sum upfront. Instead, you take out money as needed and repay what you’ve used. You only pay interest on the amount you’ve actually borrowed.

Think of it like a credit card, but designed with businesses in mind. It’s there when you need it—and if you don’t use it, you’re not paying for it.

Business lines of credit are often used for short-term needs: smoothing over cash flow gaps, covering unexpected costs, or taking advantage of time-sensitive opportunities.

In most cases, they’re revolving, which means that once you repay what you’ve borrowed, that money becomes available to use again—without reapplying. Some lines of credit do have a fixed term, though. This means you’ll need to reapply once the term ends if you want continued access.

Types of business lines of credit

There’s no one-size-fits-all when it comes to business credit. Here are the main types to consider.

• Revolving line of credit: This is the most common type. You can withdraw, repay and re-use funds as long as you stay within your limit and make repayments on time.
• Non-revolving line of credit: You can use the funds once, and once they’re repaid, the facility ends. This works more like a flexible loan and is often used for one-off purchases like equipment or specific projects.

• Secured line of credit: You offer assets—such as property, vehicles or stock—as collateral. Since the lender has some security, interest rates tend to be lower and limits can be higher.

• Unsecured line of credit: No collateral is required. This speeds up the application process, but interest rates may be higher and credit limits lower.

• Traditional bank lines of credit: Offered by many high street banks. They may offer competitive rates but tend to involve more paperwork, stricter criteria and longer wait times for approval.

• Online lenders and fintech providers: Often more flexible and faster to apply to, with streamlined online processes. Ideal for smaller companies or newer businesses needing access to business finance in a short time.

Whatever type, and whoever your provider is, business lines of credit should be regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

How does a business line of credit work?

A business line of credit gives you flexible access to funds whenever you need them. Up to a set limit. Once your application is approved, your lender agrees a credit limit, say, £50,000. You can then withdraw from that pot as and when required.

Let’s say you only use £10,000. You’ll only pay interest on that £10,000, not the full £50,000. You’ll repay what you’ve borrowed, and in most cases, that money becomes available to use again. This is what’s known as revolving credit.

Accessing funds is usually quick and easy. Most lenders provide an online dashboard or app where you can transfer money directly into your business bank account. Repayments are typically made monthly, and will include interest plus a portion of the borrowed amount (the principal). Exact repayment terms will vary depending on your lender and agreement.

Here’s how the process typically works:

• Apply for a line of credit with a lender (either online or through a bank), providing any financial information required.
• The lender reviews your application.
  • While each lender has a different method for checking applicants, they’ll consider factors like your business credit report (with the help of credit reference agencies), credit utilisation ratio (i.e. the percentage of your available credit you’re currently using), annual revenue and balance sheets. Essentially, they’re figuring out your businesses’ financial health and how “low risk” or “high risk” the borrowing agreement is.
• If approved, you’ll get a maximum credit limit.
• Withdraw funds as needed, up to your limit. No need to draw the full amount.
• Pay interest only on the amount you use, not the total available.
• Make monthly repayments, usually covering interest and a portion of the “principal”.
• As you repay what you've borrowed, your available credit is restored (if it’s a revolving facility), so you can draw from it again without reapplying.

Why would a company use a line of credit?

No matter how well a business is run, there are times when cash flow doesn’t keep up with day-to-day demands. Maybe a big invoice is unpaid, or a one-off expense suddenly lands on your desk. That’s where a business line of credit can be a real asset. It gives you flexibility to deal with short-term gaps or unexpected costs—without scrambling for a loan or dipping into emergency funds.

A line of credit can help in all sorts of situations. For example, you might be waiting on customer payments but still need to cover staff wages or supplier bills. Or maybe you want to stock up on inventory ahead of a seasonal rush, but your available cash is tied up elsewhere. You might even come across a time-limited opportunity—like a discount on data storage—and want to move quickly before it disappears.

In all these cases, a line of credit gives you breathing space and options. 

Here are a few business advantages.

What are the advantages of a business line of credit?

• You only pay for what you use: interest is charged only on the amount you draw, not the full credit limit.
• It’s reusable (if revolving): once you repay what you’ve borrowed, the credit becomes available again. No need to reapply.
• Helps smooth cash flow: perfect for smaller companies with irregular income or clients who take time to pay, helping manage day-to-day costs.
• Fast access to funds: approvals can be quick, especially with online lenders—sometimes within 48 hours or a few days.
• Use it your way: you’re not restricted to a specific purchase or spending plan. Draw what you need, when you need it.
• Less debt pressure: because you only borrow when necessary, it feels more manageable than committing to a large loan upfront.
• Builds your business credit: responsible use can improve your business’s credit score—making it easier to access lower interest rates and future business finance.

Are lines of credit a good idea?

We can’t tell you whether a line of credit is a good idea for you specifically, because it depends on your unique circumstances. 

However, one general upside to using a business line of credit is that it can offer an extra bit of breathing space when things get tight. It can help a company stay on top of day-to-day costs, and gives freedom to act quickly when opportunities arise. Used well, they can make a business more agile, resilient and able to grow.

But like any financial product, a line of credit isn’t a magic fix. It’s not always the right choice for every situation. So before jumping in, it’s worth considering the potential downsides.

What are the disadvantages of a business line of credit?

• Higher interest rates: compared with traditional loans, lines of credit often come with higher interest rates—particularly if they’re unsecured.
• Short-term solution: while helpful in the moment, a line of credit isn’t built for long-term financing.
• Fixed access period: some lines of credit are only available for a set time.
• Temptation to overspend: it’s easy to dip in too often, which can lead to high levels of debt.
• Variable interest rates: some credit lines come with fluctuating interest rates, which could impact your financial stability.
• Fees and penalties: missing a repayment can negatively impact your company’s credit rating.
• Lower borrowing limits: may not be suitable for large investments or high-value business transactions.

Is a line of credit better than a loan?

While we’re on the topic of pros and cons—is a business line of credit actually better than a loan? The answer depends on what you need the money for, how quickly you need it and how flexible you want the repayments to be.

If you’re managing short-term expenses, bridging a cash flow gap, or want a flexible safety net, a line of credit can be helpful. You can dip into it when needed, borrow smaller amounts, repay on your own terms and only pay interest on what you use.

But if you’re making a bigger investment—like buying equipment, expanding your space, or hiring for a major growth phase—a traditional business loan might be the better choice. You get a lump sum upfront with fixed monthly repayments, making it easier to plan and budget over the long term.

Some businesses also weigh-up a line of credit against a business credit card. Both offer flexible access to funds, but credit cards are typically used for smaller, day-to-day purchases. A line of credit often offers better interest rates and more repayment flexibility, making it better for larger or more strategic use.

How to get a business line of credit

How do you apply for a business line of credit?

If you’re thinking about setting up a business line of credit, the good news is it’s usually a pretty straightforward process. And in many cases, it can be faster and more flexible than applying for a traditional business loan.

The key thing to remember? It’s often worth applying before you actually need it. When your business is in a strong position—with healthy turnover and good cash flow—you’re much more likely to get approved, and on better terms.

You can apply through a high street bank, credit union or an online lender. Some might ask for more paperwork than others, but here’s an idea of what the process looks like.

1. Tell the lender a bit about your business

You’ll be asked to explain what your business does, how long it’s been trading, and what you’d like the credit line for. This helps the lender understand your goals and overall financial position, and whether a line of credit is the right fit.

2. Get your documents ready

Most lenders will want to see things like:

• Your latest filed company accounts
• At least 6 months of business bank statements
• Evidence of revenue, business transactions, equity and cash flow
• A business plan or financial statements and cash flow forecast
• Your business credit report and company payment history
• Details on any outstanding debt or financial obligations

Your application might also include checks on registered directors or business partners, your company’s credit rating and information filed with Companies House.

3. Send your application and wait for a decision

Once you’ve provided all your documents, depending on the lender, you could be approved in as little as 48 hours. Your lender will advise on timelines and let you know if any extra info is needed.

Once your line of credit is in place, you can withdraw funds as needed.

What credit score do you need for a business line of credit?

There’s no magic number when it comes to credit scores for business lines of credit. Lenders look closely at your overall credit history, both personal and business, depending on the nature of your company. But a higher score will always help.

In general, credit bureaus rank credit scores as either poor, fair, good or excellent.

• If you’re a sole trader or running a very small business, lenders are more likely to assess your personal credit score and personal finances. Different credit reference agencies have different scoring systems, but at least a good personal credit rating is usually required.
• If you’re a limited company with a longer trading history, lenders will check your company credit score—which reflects how your business has managed credit and payments in the past. Business credit scores work slightly differently again. But at least a good score is usually needed.

If your business is new or doesn’t yet have a good business credit score, don’t worry. Some lenders are still open to start-ups, particularly if the registered director has a good credit score or you have a separate business bank account showing consistent income. Filing accurate company records and demonstrating good credit behaviour are essential first steps.

Quickfire summary: what is a business line of credit?

A business line of credit is a flexible form of borrowing that provides access to funds when you need them—without the need to take out a lump sum loan. It’s ideal for smoothing cash flow, seizing new business opportunities, or covering short-term expenses. You only pay interest on the amount you use.

There are different types of lines of credit available such as secured and unsecured, or revolving and non-revolving, each suited to different business needs. Whether you’re a small business owner just starting-out or scaling a successful business, maintaining a good business credit score, keeping up with monthly payments and staying on top of financial records will all help.

At Howden Insurance, we understand every business has unique risks and challenges. That’s why we offer specialist cover tailored to you. From professional indemnity and public liability cover to specialist insurance for specific sectors, we’re here to help you plan for the unexpected. So you can grow your business with confidence. 

Get in touch today and let us build the right policy for your business.