Could a business line of credit be right for your small business?

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Is your monthly income irregular? Maybe you’ve got a revenue-driving marketing campaign in mind, or just need a way to cover unexpected expenses during an off-season. In many cases, a business line of credit can give you easy access to the funding your small business needs, as and when it’s needed. 📈

Table of contents:

How a business line of credit works

A business line of credit, sometimes referred to as an overdraft, is a preset amount of money that you can borrow from as you like. The funds you use are then paid back through repayments usually consisting of principal, interest and a subscription fee to keep the line active. Repayments are often flexible, so you can make ad-hoc lump sum payments to save on interest without being penalised.

The difference between a business loan and a business line of credit is that a loan offers you a one-time lump sum of money, whereas you can dip into a line of credit when you need it, as long as the line is active and you’re within your approved limit. Interest on a line of credit will only accrue on the amount that you use, from the point you withdraw it. With a business loan, interest accrues on the full amount immediately.

For example… A lender approves you for a credit line with a limit of £10,000. You withdraw £3,000. You make monthly repayments, including interest, to pay back the £3,000. A few months down the line, you withdraw another £5,000 and start making repayments on this amount. This withdrawal can be done before you’ve fully repaid the initial £3,000 you borrowed.

What a business line of credit can be used for

A business line of credit is a useful finance choice when your borrowing needs are hard to predict. You can use it to:

  • Cover operational costs and maintain a positive cash flow whilst you’re chasing outstanding invoices and late payments
  • Buy inventory in bulk in order to access purchase discounts
  • Offset unforeseen expenses, such as a higher energy bill, equipment repairs and ad-hoc services such as pest control
  • Invest in a new marketing campaign to drive revenue
  • Inject money into the areas of your business that need more resources
  • Upgrade to new equipment, in order to be more efficient
  • Stay prepared if your cash flow forecast predicts a seasonal shortage in income

If you find you’re constantly relying on a business line of credit to pay your day-to-day expenses, then it may be time to optimise your accounts receivable process to improve your cash flow. You could streamline your invoicing process, for example.

💡 Expert insights

As Tide’s Cash Flow Expert and, with over 40 years experience of credit management, Philip King is passionate about cash flow and supporting small businesses.

Previous roles he has held include that of Interim Small Business Commissioner for the UK Government during 2020 and 2021. This involved providing support and advice to small businesses on their trading relationship with customers, particularly in respect of payment issues. As the Chief Executive of the Chartered Institute of Credit Management between 2005 and 2020, he also promoted the importance of effective cash flow management across industry by working with small businesses to improve their payment performance.

Q1: How can a line of credit help me maintain a positive cash flow?

A line of credit helps cover unexpected expenses and fluctuations in cashflow. Costs and expenses rarely arrive regularly or consistently so the demands on cashflow peak and trough. Sometimes this puts pressure on cashflow and a gap can open up. A line of credit can help fill that gap and allows you to maintain a positive bank balance despite the swings in money coming in and going out. Maintaining a balance in this way helps you avoid the stress that can be caused by worrying about whether funds are going to be available when required.

Q2: Is it worth using a business line of credit even if I have the money to pay for things immediately?

Having a line of credit in place means you have access to funding if and when you need it. If a customer fails to pay you on time or an opportunity arises that you don’t want to miss, there is money available for you to use. Never say never; even if you can pay for things immediately today doesn’t mean that will be the case tomorrow. Arranging a line of credit now while you may not yet need it will be easier and less stressful than trying to arrange funding in a panic when a crisis has arisen.

Q3: How can a business line of credit help build my credit score?

Using any form of credit helps build your credit score, and a line of credit will do the same. When you establish a record of successful borrowing and repayment, particularly over a period of time, you will enhance your credit score and demonstrate that your business is a good credit risk. Building a positive credit score will be a real benefit if you want to access funding in the future, or if you want to open credit accounts with trade suppliers.

Different types of business lines of credit

A business line of credit can be secured or unsecured, and revolving or non-revolving.

Secured vs unsecured business lines of credit

Secured
An asset is required, which the lender will put a lien (a legal claim) on so that they may be able to repossess it if you don’t make your repayments. Secured business lines of credit often offer a larger credit limit and a lower interest rate compared to an unsecured one.
Unsecured
No asset is needed as collateral. This does mean they usually come with a lower credit limit and a higher interest rate.

Some small business owners may prefer an unsecured line of credit as no assets are provided as collateral. Taking this approach can work particularly well if you’ve already provided your assets as collateral for a secured business loan or other credit option.

Revolving vs non-revolving business lines of credit

Revolving
Each amount you withdraw and then repay will become available for you to borrow (except for charges such as interest).
Non-revolving
Once you’ve withdrawn up to the preset limit, the line will close, even once you’ve repaid it.

How and where to get a business line of credit

Both traditional and alternative lenders offer business lines of credit. Eligibility criteria, charges, application processes and terms and conditions will differ between lenders though. 

Find out whether a lender will run a hard or soft credit search on you or your business when you apply for a line of credit with them. Too many hard credit checks can harm your business credit score, so don’t make lots of applications within a short period of time. On the other hand, a soft credit check won’t appear on your business credit report or affect your business credit score.

Introducing Tide Credit Line 🚀

Calling all Tide members! There are no lengthy applications that damage your credit score with our Credit Line.

  • No application required: We run daily eligibility checks and pre-approve you once you meet the criteria
  • Costs made clear: We’ll show you the full amount we’re offering you, the annual interest rate and the subscription fee before you activate your Credit Line
  • Instant activation: We’ll run a soft credit and director check when you activate your Credit Line, so neither your business nor personal credit score will be affected
  • Flexibility: View the amount you’ve borrowed and your repayment schedule in your Tide app. You can deactivate your Credit Line at any time if it’s not needed, then reactivate it when it is (as long as you still meet the eligibility criteria)

Fund your working capital and build your credit score with Credit Line - Activate your pre-approved line of credit - Use the funds you need when you need it Check eligibility

Fund your working capital and build your credit score with Credit Line. Activate your pre-approved line of credit. Use the funds you need when you need it. Check eligibility.

If you’re eligible, tap More > Cashflow Insights > Solutions > Credit Line in your Tide app to view your pre-approved offer.

Wrapping up

A business line of credit is an easy funding option that can help you finance your growth plans or fund unexpected expenses. You can withdraw the funds all at once, or make smaller repeat withdrawals over a longer period of time. 

There are many lenders on the market offering business lines of credit, including Tide. With no application required, clear costs and instant activation, Tide Credit Line offers flexible funding to meet your business needs. 💸

Photo by Jason Goodman, published on Unsplash

Amina Sinclair-Diallo

Midweight Copywriter

Tide Team

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