Is a line of credit cheaper than a working capital loan?

On a like-for-like basis, headline rates can be similar. The total cost diverges with usage: a lightly used line is often cheaper, a constantly maxed line is often dearer than a term loan for the same average balance.

Can I have both at the same time?

Yes, and many UK SMEs do — a term loan for a known project, a line for everyday smoothing. Lenders will check combined affordability and existing debt, so disclose all facilities at application.

Which is easier to qualify for?

Underwriting is broadly similar — trading history, turnover, affordability, credit. Lines of credit may have lighter affordability tests on the smaller end, but lender criteria vary widely. Indicative quotes are the fastest way to compare.

What happens at line-of-credit renewal?

The lender reassesses turnover, account conduct and credit, and may raise, lower, reprice or withdraw the limit. Plan operations as if the line could be reduced, particularly through a downturn.

Working capital loan vs line of credit (UK SME guide)

When each option usually fits

When Working capital loan usually fits

Signal: — You have a single, known working-capital need with a clear amount and timeline.
Signal: — You want a fixed monthly repayment you can plan against.
Signal: — You prefer a defined end date for the debt rather than an ongoing facility.
Signal: — Total cost predictability matters more than draw-down flexibility.

When Business line of credit usually fits

Signal: — Cash-flow gaps are unpredictable in size and timing.
Signal: — You want to pay interest only on the amount drawn, not the full limit.
Signal: — You expect to draw, repay and redraw multiple times in a year.
Signal: — Operational discipline is in place so the facility is not constantly maxed.

Side-by-side comparison

Dimension	Working capital loan	Business line of credit
Structure	Lump-sum loan repaid in instalments	Revolving credit drawn and repaid as needed
Interest basis	On the original balance over the term	On the daily or monthly drawn balance
Repayment	Fixed monthly instalments	Minimum monthly payment; clear and redraw at will
Typical term	Three months to three years	Revolving, with annual or biennial review
Typical amount	£5,000 to £250,000 for most UK SMEs	£1,000 to £250,000 limit, often smaller than a loan
Fees	Arrangement fee on drawdown	Possible setup, non-utilisation or renewal fees
Flexibility	Single drawdown; lump sum at the start	Multiple drawdowns over the life of the facility
Best for	One-off spend: stock buy, refurbishment, marketing push	Ongoing cash-flow smoothing across a trading year
Discipline required	Lower — fixed schedule enforces repayment	Higher — risk of becoming a permanent feature

Shared considerations

Both are unsecured working-capital products; personal guarantees are common.
Both are sized to affordability, trading history and existing debt.
Both can carry arrangement, renewal or non-utilisation fees — read the schedule.
Total cost depends on how the facility is used, not just the headline rate.

Frequently asked questions

Is a line of credit cheaper than a working capital loan?: On a like-for-like basis, headline rates can be similar. The total cost diverges with usage: a lightly used line is often cheaper, a constantly maxed line is often dearer than a term loan for the same average balance.
Can I have both at the same time?: Yes, and many UK SMEs do — a term loan for a known project, a line for everyday smoothing. Lenders will check combined affordability and existing debt, so disclose all facilities at application.
Which is easier to qualify for?: Underwriting is broadly similar — trading history, turnover, affordability, credit. Lines of credit may have lighter affordability tests on the smaller end, but lender criteria vary widely. Indicative quotes are the fastest way to compare.
What happens at line-of-credit renewal?: The lender reassesses turnover, account conduct and credit, and may raise, lower, reprice or withdraw the limit. Plan operations as if the line could be reduced, particularly through a downturn.