Business line of credit explained

What a line of credit is

A business line of credit is a pre-approved borrowing limit your company can dip into whenever it needs to, rather than receiving as a single lump sum. You are given a ceiling — say £50,000 — and you draw against it as required, up to that credit limit. It is a revolving facility: the headroom you repay becomes available to use again.

The value is having funding on standby. A line sits ready in the background, so when a cost lands unexpectedly or an opportunity needs quick cash, you draw on what is already arranged instead of starting a fresh application each time. For businesses with lumpy or unpredictable cash flow, that readiness is the whole appeal.

Draw, repay, redraw — day to day

The mechanics are what make a line different from a one-off loan. In a typical month:

• Draw. A supplier invoice is due before a customer pays, so you draw £15,000 from a £50,000 line. You now have £35,000 of headroom left.
• Repay. Your customer pays a fortnight later and you repay the £15,000. Your full £50,000 limit is restored.
• Redraw. Next month a different gap appears and you draw again — no new application, the facility is simply there.

Because you only pay for what you draw and only while it is drawn, a line costs little when idle and flexes precisely to your needs. That is its core advantage over borrowing a fixed sum you may not fully use. Model how a line would behave against your cash cycle with the working capital calculator.

How it differs from a term loan

A term loan and a line of credit solve different problems. A term loan hands you a fixed amount on day one, which you repay in set instalments over a defined period — ideal for a known, one-off purchase like a vehicle or a fit-out. A line gives you flexible, reusable access for needs that come and go.

The simple test: if you know exactly how much you need and what for, a term loan is often cleaner; if the requirement is recurring or hard to predict, a line usually fits better.

How it differs from an overdraft

A line of credit and a bank overdraft share the draw-repay-reuse principle, which is why they are often confused. The practical differences are in structure and reliability. An overdraft is a feature bolted onto a bank current account, frequently repayable on demand and capable of being reduced or withdrawn by the bank at short notice — exactly when you might be relying on it.

A dedicated commercial line is arranged as a standalone facility, assessed on your company's trading, and typically gives clearer, more dependable headroom than an overdraft's discretionary limit. For a business that wants funding it can count on rather than a current-account convenience, that certainty matters. Credicorp's Flex facility is a revolving line of exactly this kind — lent to the company, with no personal guarantee. You can register to apply. This guide is educational, not financial advice.