The main advantage of a line of credit is its flexibility. It is an arrangement with a financial institution that gives a business access to a maximum amount of credit–sort of like a credit card. Businesses can tailor what they withdraw (known as ‘drawing down’) according to their needs.

Interest tends to be paid only on the amount a business spends, not on the entire credit line they were approved for. Each drawdown becomes a separate business loan.

A business loan, on the other hand, is a single sum of credit given by a lender to a business. Categorised as a debt-based financing arrangement, it is often used by companies to fund investment and growth, or cover unforeseen business costs. Because a business loan is a fixed amount, it suits companies that know exactly how much finance they need.