Definition
A line of credit is a reusable pool of funds, capped at an agreed limit, that a business dips into when needed and tops back up as customers pay. Interest generally applies only to the amount drawn, but establishment and line fees may also apply. It suits recurring short-term cash flow gaps rather than long-term purchases, and can be unsecured or secured.
Think of it as standby money for the stretches when bills land before customer payments do.
In practice
You draw from the line, usually into your transaction account, when you need cash, and repay when customer payments arrive. Each repayment frees the limit to be used again. Some lines require minimum monthly repayments; others only interest until a review date.
Costs to check
Look at interest on the drawn balance, any line or facility fee charged on the full limit, establishment fees and review fees. A large limit that is rarely used can cost more than it is worth.
When it fits
Lines of credit work best for predictable, recurring gaps that close on their own. Our line of credit review covers the pros and cons, and the cash flow gap calculator helps size a limit. To explore one for your business, make one enquiry.
Common questions
How does a line of credit compare with an overdraft?
They are similar. An overdraft lives inside your everyday account, whereas a line of credit normally sits on its own and you transfer from it.
How is the limit decided?
For unsecured lines, mainly from turnover, conduct and existing debts. For secured lines, the security value also matters.
Sources and further reading