Raising Finance

How to get a flexible line of credit

7 min read

14 November 2018

Deputy Editor, Real Business

When you're cash-strapped and an invoice hasn't been paid on time, it's easy to tip into the red side of finance. This is typically when you'd pursue a flexible line of credit. Find out everything you need to know about a flexible line of credit, from the typical eligibility criteria to reputable providers in the UK.

When you sign up to a bank, one of the first things you’ll be asked is whether you want an overdraft account. It allows you to draw money even when your funds run dry.

Think of it as borrowing a pre-set amount from the bank. You’ll be given a period of time before the bank knocks on your door with a reminder that you need to it back.

A flexible line of credit is similar. However, it comes without bank attachments and you can borrow from £1,000 up to £200,000.

After establishing your “overdraft account”, you can take out as much or little money whenever you see fit, provided you don’t go over the limit.

An example of when you would choose a flexible line of credit

Here’s an example. Christmas is taking hold of the nation – and your worries have only just begun.

You sell humorous small gifts, perfect for stockings and Christmas parties. There’s a sudden boost in demand and you need to get additional helpers.

Of course, once that sudden demand diminishes, your staff will likely take time off for the rest of December.

Being on top of cash flow during this period is essential, especially when you think an invoice could be delayed. So you get a flexible line of credit.

It will allow you to borrow money when you need to pay for extra staff throughout the slow period. Here’s why.

Is a line of credit different to a traditional loan?

Yes, it is. The expectation of when the finance has to be used by is the biggest difference between a flexible line of credit and a loan.

With traditional loans, you are approved for and given a certain amount of money to use in one go. These tend to suit companies that need vast amounts of capital.

Credit lines will be made available for a stretched period of time. You will be able to tap into that capital whenever you see fit.

This makes it a suitable finance solution for short-term goals, like re-stocking, last-minute overhead costs or office expansion.

The advantages of a flexible line of credit

Compared to most forms of raising finance, the process of getting a flexible line of credit is easy.

It’s often done through an online application and there isn’t much documentation required. Sounds nice if you don’t have the time to pitch to investors or approach banks, right?

More importantly, as an SME, you’ll only pay interest on what you use and it can help you refinance existing loans.

The disadvantages of having a flexible credit line

All form of loans have their downsides.

Much like a credit card, there’s a monthly interest rate. While the interest rate is smaller, there are additional fees that change according to the lender. You don’t want to be buried by those fees.

Most providers prefer to have a personal guarantee in place. Someone from the top echelons of the business takes responsibility for debt through their own assets.

Note that you can, however, pursue what’s called an unsecured line of credit. There’s no collateral, but it’s higher to acquire.

The money is also only available for a limited time span – it won’t be permanently put on the side for you to use.

What to watch out for (the fine print)

When it comes to standard loans, you tend to make a fixed payment each month, lasting for a few years. This isn’t the case for credit lines.

You’ll be required to pay back small amounts, but there are normally “periods” assigned to paying back and when you can use the available capital.

Of course, you can always ask to borrow more at the same time.

If your borrowing overtakes and interrupts your rate of repayment, providers will ask that you slow down and focus more on paying them back.

This is typically known as “amortising” payments.

Here are the biggest points you need to take into consideration:

  • Its pay-as-you-go format gives the unfortunate feel that money is limitless. It’s not. The amount you withdraw can pile up quickly.
  • While you do have time to wait and see what you want to spend the money on, don’t wait too long. The finance won’t be held aside for you indefinitely.
  • If you’re going to take most of the money out in one go, perhaps it’s best to think of a traditional loan.
  • Timing is key. If you’re a seasonal business, get yourself a flexible credit line when you know you’ll be most strapped for cash.
  • Online providers will typically have looser qualifications than banks. They will charge higher rates though.

Eligibility for a flexible line of credit in the UK

You can ask for a flexible line of credit from most banks and alternative lenders.

Either way, some lenders prefer businesses that are able to demonstrate a good credit history.

In this case, those having recently undergone a restructure or have a limited track-record to show off may be declined.

Typically, you must have been trading for at least 12 months to apply.

There’s a reason why good credit is emphasised. If you’re thinking about eligibility, also understand that the interest you acquire through outstanding balance and the amount you can lend all depends on your credit rating.

To determine your eligibility, providers will weigh your ability to pay back loans and asses what assets they can ask as collateral damage through the personal guarantee.

UK providers of flexible credit lines