The Line of Credit AKA “The Buffer”

The line of credit works like an overdraft. You have a pot of money which acts as a buffer. You can dip into this as and when you need it.
The Line of Credit AKA “The Buffer”

HOW DOES IT WORK?

Line of credit works like an overdraft. You have a pot of money which acts as a buffer. You can dip into this as and when you need it. You only pay interest on what you’ve used. However, bear in mind that once the money has been used, it is not renewed.

HOW MUCH DOES IT COST?

Lenders will typically give you credit of up to 10% of your annual revenue. The costs can range from 7-25% of the buffer, plus a fee for when you’ve dipped into it. The arrangement can last from 6 months to 5 years depending on what you’ve agreed.

Repayments are taken on a daily basis.

CASE STUDY

Sophie runs an art shop. She has had strong sales online, however, summer is coming and she has plans to do an offline pop-up store in Box Park. Sophie has to pay for some visual and creative work for the pop-up and uses her credit line to pay for materials before she recovers the spend through sales.

Sophie applied for a £20,000 credit line with a 15% interest charge. When she’s dipped into the credit line by £10,000 she pays £4 per day until she pays back the funds.

WHAT ARE LINE OF CREDIT LENDERS LOOKING FOR?

Your business must have:

  • at least 6 months trading to show your business is stable.


On top of this, you must provide a personal guarantee. A personal guarantee is a valuable asset like a property, vehicle, stock, an investment or cash. This is so that if for whatever reason your business can’t repay the line of credit, then you can.

WHAT WE LOVE ABOUT LINES OF CREDIT

  • Lines of credit offer you peace of mind and a buffer that ease cash flow concerns.
  • Many lenders offer interest-only arrangements meaning you only pay when you dip into it.

WHAT TO WATCH OUT FOR

Just like an overdraft, living in a line of credit can be more expensive than other types of funding. This is because it’s designed only to be dipped into as and when you need it - not to function within it.

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