Which is the Best Business Line of Credit Option for Small Businesses?

Maintaining a steady cash flow can be a challenge for small businesses and SMEs. Whether it's to cover unexpected expenses, fund growth, or manage seasonal fluctuations, a business line of credit (LOC) can provide the financial flexibility you need.

Unlike term loans, a line of credit lets you borrow, repay, and borrow again as needed. This flexibility makes it a popular choice for business owners. In this guide, we’ll explore the key considerations, how to compare lenders and where to look to find the best business line of credit for you.

What is a business line of credit?

A business line of credit works like a flexible loan that gives you access to funds up to a predetermined limit. If they renew automatically, they are known as a revolving credit facility.

It works similarly to a credit card. You only pay interest on the amount you use, and any sum repaid is freed up to borrow again. 

Core benefits

• Flexible access to funds: Draw money when needed and only pay for what you use.
• Interest savings: No interest is charged on unused credit.
• Reusable credit: Borrow, repay, and borrow again without reapplying.

What's the difference between a business line of credit vs term loan?

At first glance, LOC and term loans might seem quite similar. But if we put these finance products side-by-side, the differences become apparent:

• Business line of credit: Provides ongoing access to funds, ideal for managing fluctuating cash flow or covering unexpected expenses. A LOC isn’t tied to any particular spend, it can be used in a wide variety of ways, whether that’s buying materials, repairing a leaky pipe or covering payroll during a lean month.
  
  
• Term loan: A fixed lump sum with set repayment terms, suitable for large, one-time investments like equipment purchases. Term loans are often used for projects requiring a defined budget, such as purchasing machinery or funding office renovations.

How to choose the best business line of credit

Selecting the right line of credit depends on your unique needs and circumstances. Here’s a step-by-step guide to making an informed choice.

1. Identify your needs

Understanding your financial goals and having a good idea of what the money will be used for will help narrow down the choice. If, for instance, you need access to credit quickly then a bank might not be the best provider.

In contrast, if you need a high-limit (some banks offer LOC into the millions of pounds), then a big bank is better suited to your needs. Common uses for a business LOC include:

• Managing short-term cash flow: Cover payroll, utilities, or other operational expenses.
• Funding startups: Support initial setup costs and early-stage growth.
• Purchasing inventory: Prepare for seasonal demand or take advantage of supplier discounts.

2. Compare Lenders

Different lenders will vary when it comes to things like the application process and what kinds of sums they can offer, so it’s worth thinking about what your business’s priorities are. There are two main types of lender for business lines of credit: 

Banks

• Traditional providers offer competitive interest rates.
• They typically have stricter eligibility requirements and longer approval times.

Alternative lenders

• Fast approval processes and flexible terms.
• Options include online lenders specialising in small business financing.

3. Look at terms and rates

Be sure to read the small print when assessing different options for business lines of credit. In particular, take special notice of: 

• Interest rates: Fixed rates offer stability, while variable rates can change with market conditions.
• Fees: Look out for maintenance fees, draw fees, and potential early repayment penalties.
• Repayment flexibility: Check whether the lender offers interest-only repayment options or requires monthly principal payments.

4. Check Eligibility Requirements

• Credit score: Many lenders require a minimum credit score.
• Trading history: Some lenders prefer businesses with a track record of at least 6-12 months.
• Revenue thresholds: Ensure your business meets the minimum income requirements.

Best business line of credit options

Here are some of the options you could consider:

Best business line of credit for startups

• Capital on Tap: Provides credit limits up to £250,000 with no annual fees and a straightforward application process. Designed for small businesses needing quick and flexible funding.

Best Banks for Business Lines of Credit

• HSBC: Designed for scaling businesses with substantial funding requirements, including startups in later stages of growth, established SMEs, and publicly listed enterprises. Credit limits range from £500,000 to £25 million. Interest rates are tailored to each business’s risk profile and creditworthiness.
  
  
• OakNorth: The bank does not publicly disclose specific interest rates or credit limits for these facilities, as terms are based on your financial profile and requirements. Its website does mention cases where the credit limit goes up to £20m, implying a high degree of flexibility on the credit limit. 

Best online business line of credit lenders

• iwoca: An iwoca Flexi-Loan works similarly to a line of credit, offering credit limits of up to £1,000,000, making it suitable for a wide range of funding needs, from managing short-term cash flow gaps to financing larger growth opportunities. Funding decisions are usually delivered within 24 hours. Rates start from 3.33% per month, depending on your credit profile and the amount you need to borrow. 

Secured vs unsecured business lines of credit

When exploring lines of credit, it’s crucial to understand the difference between secured and unsecured options. Here are the crucial differences you need to understand:

Secured line of credit

• Requires collateral: Such as property, inventory, or equipment.
• Lower interest rates: Due to reduced risk for the lender.
• Higher risk for borrowers: You could lose the collateral if unable to repay.

Unsecured line of credit

• No collateral required: Approval is based on creditworthiness and revenue.
• Higher interest rates: Reflect the lender’s increased risk.
• Faster approvals: Suitable for businesses needing immediate funding.

Best business line of credit rates

Finding the most competitive interest rates for a business LOC means understanding the key factors that influence pricing. Your business's credit score plays a significant role—higher scores often unlock lower interest rates, as they signal financial reliability to lenders.

Secured loans tend to have lower rates since you’re securing the loan against something valuable, like property or equipment. This lowers the risk for lenders and it’s reflected in a lower interest rate.  

The type of lender you choose can have a substantial impact, as well. Traditional banks tend to offer lower rates, though they may have stricter criteria for approval.

In contrast, online and alternative lenders may charge slightly higher rates but provide faster access to funds and more onerous eligibility requirements.

The size of your credit line and your repayment history also matter. Businesses managing larger credit limits effectively, with consistent and timely repayments, may benefit from discounts or more favourable terms.

Look beyond the advertised interest rate to examine the full cost of borrowing, including additional fees such as draw fees, maintenance charges, or early repayment penalties. This approach ensures you’re not only getting a competitive rate but also favourable terms tailored to your needs.

Best practices for managing a business line of credit

Once you’ve secured a line of credit, managing it wisely is crucial to ensure it supports your business effectively. Here are some tips:

• Borrow only what you need: Avoid the temptation to overuse your credit.
• Repay promptly: Timely repayments minimise interest costs and maintain good credit standing.
• Plan for cash flow gaps: Use the credit strategically for operational needs or growth opportunities.

Why fund your business with iwoca

When it comes to accessing credit for smaller businesses, iwoca offers something unique. Banks may want to see years of financial statements and trading history, whereas we check your eligibility through data from your accounting software, bank statements and VAT returns.

When you’re approved for a Flexi-Loan, we’ll set a credit limit for you (typically around one month's revenue). You can then transfer money from the loan to your bank account as you need it.

You’re only charged interest on the amount you draw down. And you can repay at any time, with no extra charges. An iwoca Flexi-Loan offers you: 

• Fast approvals: Decisions in hours, not weeks.
• No hidden fees: Clear, upfront costs with no surprises.
• Flexible credit limits: Borrow up to £1,000,000.
• Fully digital experience: Apply online and integrate with your existing business tools.

Explore iwoca’s business line of credit options today to discover how they can help your business thrive.

Best business lines of credit FAQs

What is the best business line of credit for small businesses?

The best line of credit depends on your needs, creditworthiness, and preferences. iwoca, Capital on Tap, and HSBC are strong contenders.

How do I qualify for a business line of credit?

Most lenders evaluate your credit score, trading history, and revenue. Alternative lenders may have more flexible criteria.

How do I find the best rates for a business line of credit?

Compare multiple lenders and focus on both the interest rates and associated fees.

Which banks offer the best business lines of credit?

Banks like HSBC and OakNorth are known for competitive rates and robust support for small businesses.

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