A business line of credit is a pre-approved pot of money you draw from only when you need it, repay, and draw again. For UK SMEs juggling late invoices, seasonal swings and stock orders, it is often a better fit than a term loan — and it is also, if you do not read the pricing carefully, one of the more expensive ways to borrow.
This guide covers how these facilities actually work in 2026, what they cost once you convert the monthly rates into annual ones, who is lending, and when a different product would serve you better.
How It Works
- You are approved for a limit — commonly anywhere from £1,000 to £1,000,000 depending on the lender and your trading history.
- You draw what you need, when you need it. A £100,000 limit with £15,000 drawn means you are borrowing £15,000.
- Interest is charged on the drawn balance only — not on the full limit. This is the central advantage over a term loan.
- You repay and the limit replenishes. Hence “revolving”: the facility resets as you pay it down.
- There may be a fee on the undrawn portion. Commitment fees of roughly 0.5% to 2% a year on the unused limit are common — the price of having the money on standby.
In practice it behaves like a business overdraft, but supplied by a wider range of lenders and usually with faster decisions.
What It Actually Costs in 2026
Here is where most guides stop short. Revolving facilities are almost always quoted as a monthly rate on the drawn balance — typically 0.9% to 3.5% a month for unsecured SME facilities, with secured borrowing or a strong credit profile at the lower end.
Monthly percentages feel small. Annualised, they are not:
| Monthly rate | Roughly equivalent annual cost | Cost of £20,000 drawn for a year |
|---|---|---|
| 0.9% | ~11% | ~£2,200 |
| 1.5% | ~20% | ~£4,000 |
| 2.5% | ~34% | ~£6,900 |
| 3.5% | ~51% | ~£10,200 |
Figures are illustrative, assume the balance stays drawn for the full year and exclude arrangement and commitment fees.
That table is the single most useful thing on this page. A revolving facility used the way it is designed — drawn for three weeks to cover a late payment, then cleared — is genuinely inexpensive. The same facility left drawn all year is among the costliest borrowing a small business can carry.
The fees to ask about
- Arrangement or facility fee — charged up front, sometimes as a percentage of the limit.
- Commitment or non-utilisation fee — typically 0.5–2% a year on the undrawn balance.
- Drawdown fees — a flat charge each time you take money out, which punishes frequent small draws.
- Renewal fees — most facilities are reviewed every 12 months.
- Early repayment terms — usually favourable on revolving credit, but confirm it.
Ask every lender for the total cost of a worked example: £20,000 drawn for 60 days, all fees included. Comparing headline rates alone is how businesses end up with the dearer product.
Line of Credit vs Term Loan vs Overdraft
| Revolving credit | Term loan | Business overdraft | |
|---|---|---|---|
| Best for | Cash-flow gaps, stock, seasonal swings | A one-off asset or expansion | Small day-to-day buffers |
| Interest on | Drawn balance only | Full amount from day one | Drawn balance only |
| Repayment | Flexible, revolves | Fixed monthly schedule | Flexible, on demand |
| Typical cost | Higher rate, short usage | Lower rate, long commitment | Often the highest, and shrinking in availability |
| Speed | Often days | Weeks | Depends on your bank |
The rule of thumb: if you know exactly what you are buying and when you will repay, a term loan is usually cheaper. If you do not know when you will need it, flexibility is worth paying for.
Who Lends in the UK
- High street banks — NatWest, HSBC, Barclays and Lloyds offer overdrafts and revolving facilities, generally at the lowest rates but with the slowest, strictest process and a preference for existing customers.
- Specialist SME lenders — iwoca’s Flexi-Loan spans roughly £1,000 to £1,000,000 with interest quoted from around 1.5% per 30 days, and decisions in days rather than weeks.
- Business banking platforms — Tide offers a revolving credit facility up to £1,000,000 alongside its accounts.
- Invoice finance providers — a different structure that advances against unpaid invoices, often cheaper if late payment is the actual problem.
- Brokers — useful for comparison, but check how they are paid; commission can shape the recommendation.
Eligibility and What You Will Be Asked For
- Trading history — commonly six to twenty-four months minimum, depending on lender.
- Minimum turnover — thresholds vary widely; specialist lenders go lower than banks.
- Bank statements, typically the last three to twelve months, often via open banking rather than PDFs.
- Filed accounts for limited companies, plus management accounts if recent.
- Director credit checks — personal credit history matters, particularly for younger businesses.
- A personal guarantee — very common on unsecured facilities. This is the clause to read most carefully: it makes you personally liable if the company cannot repay.
One regulatory point worth knowing: lending to limited companies is generally outside the consumer credit protections that apply to individuals. Sole traders and small partnerships borrowing smaller sums may retain some protection, but a company director signing a facility agreement is largely in commercial contract territory. Read it as such, and take advice if the sums are significant.
When It Makes Sense — and When It Does Not
| Good use | Poor use |
|---|---|
| Bridging a 30–60 day gap while a large invoice is paid | Funding ongoing losses |
| Buying stock ahead of a known seasonal peak | Paying off other expensive debt without changing anything else |
| Taking a supplier discount for early payment | Leaving the full limit drawn indefinitely |
| Covering payroll through a predictable lumpy month | Financing an asset you will own for years — use a term loan or asset finance |
| Having standby cover you rarely draw | Treating the limit as available profit |
The failure pattern is consistent: a facility taken for short-term flexibility that quietly becomes permanent debt at short-term pricing. If your drawn balance has not touched zero in six months, the facility is no longer solving the problem it was taken for.
Alternatives Worth Comparing First
- Invoice finance — if late customer payment is the root cause, advancing against invoices is usually cheaper than borrowing against nothing.
- Asset finance — for equipment and vehicles, secured against the asset and therefore cheaper.
- Business credit card — for small, frequent purchases with a genuine interest-free window, provided you clear it monthly.
- Government-backed schemes — the British Business Bank supports guarantee schemes through accredited lenders; eligibility changes, so check current programmes directly.
- Supplier terms — the cheapest working capital available is 60-day terms negotiated with a supplier, and it costs nothing but a conversation.
Frequently Asked Questions
What interest rate should I expect?
Unsecured SME facilities commonly quote 0.9% to 3.5% a month on the drawn balance — roughly 11% to 51% annualised if the balance stays drawn. Secured facilities and stronger credit profiles sit at the lower end.
Do I pay interest on the whole limit?
No — interest applies only to what you have drawn. However, many lenders charge a commitment fee of around 0.5% to 2% a year on the undrawn portion, so an unused facility is not always free.
Will I need a personal guarantee?
On unsecured facilities, usually yes. It means you are personally liable if the business cannot repay. Never sign one without understanding the exposure, and take professional advice on larger facilities.
How quickly can I get one?
Specialist lenders using open banking can decide within days, sometimes hours. High street banks typically take weeks and ask for more documentation, though their pricing is usually better.
Does applying damage my credit file?
Many lenders run a soft search for an initial quote and a hard search only at full application. Ask which is being run before you apply, and avoid submitting several full applications in a short period.
The Bottom Line
A business line of credit is a good answer to a timing problem and a poor answer to a profitability problem. Used for weeks at a time it is flexible and reasonably priced; left drawn for a year it can cost more than a third of the balance in interest alone.
Before signing, convert every monthly rate into an annual one, get a worked example including all fees, read the personal guarantee properly, and check whether invoice finance or better supplier terms would solve the same problem more cheaply.
This article is general information, not financial advice, and rates quoted are market ranges observed in 2026 that change frequently. Business lending to limited companies is generally not covered by consumer credit protections. Speak to a qualified adviser or accountant before entering any facility agreement.
