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A business line of credit is a type of financing arrangement where a business can borrow funds from a business lender. Drawing down the funds can be done all at once or in several parts, until you reach the fixed credit limit. Each single drawn down is automatically turned into a separate loan, that will each be repaid according to a separate repayment schedule. The business repays each loan with interest, during a predetermined loan duration period.
When securing a business line of credit, you as a business owner will sign a credit line agreement with a lending institution. The agreement holds all predetermined conditions, such as the credit line limit, the interest rate and duration period. Generally the lender allows a so-called commitment period during which the business can draw down the funds. After the commitment period ends, the credit line will be ‘locked’. Each draw down, whether that is the entire credit amount or parts of it, will be turned into a separate loan that each has its own repayment schedule, varying from a couple of months (short term) to a several years (long term).
A business line of credit can be used by business owners as they see fit. Reasons you might seek a business line of credit include:
Traditionally, British banks were responsible for issuing the major chunk of business credit in the market. Nowadays the financial landscape is far more divers, offering a variety of financial solutions. Business owners can apply for a business line of credit in person, or seek financial advise, for instance from a finance broker.
This entirely depends on the financial situation of the applicant. Lenders generally base their credit assessment on a variety of factors, including your financial track record, credit score, risk profile and recent business performance. Depending on the outcome of the credit analysis, the lender will decide on the limit and duration period of your credit line. This may vary from £10k up to £1 million or more, and from several months to several years, depending on the issuing lender.
It is possible to secure a business line of credit without personal guarantee. As the lender takes over the risk from the business for an unsecured credit line, the business therefore needs to be well established and healthy to qualify. A business line of credit without personal guarantee is generally not a good solution for start ups or for businesses that have financial challenges, but works well for healthy businesses that want to grow.
A business line of credit is a fixed amount of credit, from which a business can borrow one or multiple amounts. A business line of credit is often available to a business free of cost or commitment. Each draw down from the credit line amount, will automatically become a separate loan. Only then, the business starts repaying the loan with interest, which is also the point at which the lender starts to make profit (from interest). That is the difference between a credit line and a loan.
The cost of a business line of credit may vary depending on the issuer. Securing a credit line may cost a business some form of collateral, depending on the nature of the financial solution. Furthermore the lender may charge a service fee or commission fee upfront. After drawing down the funds, the business starts repaying the loan with interest. Interest rates are highly variable but can often be researched on the lender’s website.
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