Fund-based and non-fund based credit limits

Managing a business is a full-time… business. There are employee wages to cover, suppliers to pay and investments in growth to fund – all while waiting for customer payments to come in.

A common way to make sure there’s enough cash in the bank is to set up a credit facility with your bank.

If you’ve already been exploring financing options, you’ve probably come across terms like ‘fund-based’ and ‘non-fund-based’ credit limits. They may sound complicated, but they’re not really. And understanding the difference between the two can help you choose the right financing for your specific needs.

In this article, we’ll explain what fund-based and non-fund-based credit limits are, when to consider using each type, and the potential costs involved.

Key points:

• Fund-based credit gives you direct access to cash (like overdrafts and loans), while non-fund-based credit provides guarantees and assurances rather than cash

• UK businesses typically access credit limits ranging from £3,000 to £25,000 for smaller facilities, with larger businesses securing millions in combined facilities

• Funding Options by Tide can help when optimisation working capital isn’t enough, offering access to business finance up to £20 million

What are fund-based and non-fund-based credit limits?

Fund-based and non-fund-based credit are two ways your bank may be able to support your business. The key difference is whether you receive money directly.

• Fund-based credit limits provide you with direct access to cash. When your bank approves a £20,000 overdraft or business loan, for example, you can draw on those funds and use them immediately. With fund-based credit, you’re borrowing actual money, which you’ll need to repay with interest.

• Non-fund-based credit limits work differently. Instead of giving you cash, your bank offers a guarantee or commitment to a third party on your behalf. This could include a performance guarantee or a letter of credit, which can be used if you’re bidding for a contract or trading internationally. No money changes hands, unless you default on your obligations and the bank has to pay out under the guarantee.

Both types are recorded as credit facilities on your business accounts, but they serve different purposes:

• Fund-based credit addresses immediate cash flow needs, such as paying suppliers or covering operational expenses

• Non-fund-based credit helps you secure contracts or trade opportunities without tying up your working capital, as the bank’s commitment stands in place of cash until it’s needed

These terms are standard in UK business banking and are reflected in the products and services that lenders offer.

What types of fund-based credit facilities are available?

Fund-based credit comes in several forms, with each designed for different business needs. The main options UK businesses can access include:

• Business overdrafts: Lets you withdraw more than your current account balance, up to an agreed limit. Interest is typically charged daily on the overdrawn amount.

• Term loans: Gives you a lump sum that’s repaid over a fixed period with regular instalments. These can be short-term (under 12 months) or long-term (up to several years).

• Working capital loans: Specifically designed to fund day-to-day operations, such as paying suppliers, covering payroll, or buying stock.

• Asset finance: Helps you buy equipment, machinery, or vehicles by spreading the cost over time, typically through hire purchase or leasing arrangements.

• Invoice finance: Advances cash against your outstanding invoices, typically within 24-48 hours, boosting cash flow by unlocking owed money.

What types of non-fund-based credit facilities are available?

Non-fund-based facilities focus on providing assurances and guarantees rather than immediate funding. The main types include:

• Bank guarantees: The bank promises to pay a specific amount to a third party if you’re unable to meet your contractual obligations. This can include performance guarantees (for contracts) and financial guarantees (for loans).

• Letters of credit: Particularly useful for import/export businesses. The bank guarantees payment to a supplier once certain delivery conditions are met, reducing risk for both the buyer and seller.

• Standby letters of credit: These act as a backup payment method if your primary payment fails, giving suppliers extra confidence. They’re typically used in international trade and very large contracts.

• Performance bonds: These guarantee that you’ll complete a project according to the contract’s terms. The bank will compensate the client if your business defaults.

• Bid bonds: Demonstrate to potential clients that you’re financially capable of completing a project if you win the contract.

These facilities are particularly valuable in the construction, manufacturing, and international trade sectors, where clients often need guarantees before awarding contracts or entering into large agreements.

How much can UK businesses typically access?

Credit limits can vary a lot depending on your business size, trading history, and financial position.

For smaller businesses, the average business credit card limit is currently about £5,830. And while some successful businesses with strong credit histories can access limits of £10,000 or more, specialist business cards for established companies can offer limits of up to £250,000. But most SMEs will see limits at the lower end of this range.

Business overdrafts and cash credit facilities for SMEs typically range from £5,000 to £100,000, although larger businesses can often access far higher amounts. The limits are typically based on monthly turnover, with many banks offering credit lines equivalent to one to three months of revenue (subject to affordability and risk assessment).

Non-fund-based facilities, such as performance guarantees and letters of credit, can be a lot larger than fund-based limits. For example, construction companies may be able to secure guarantees worth millions for major projects. But the size of each facility will depend on the bank’s risk appetite, the sector, and the business’s track record.

When should you consider fund-based credit?

Fund-based credit may be suitable when your business needs to access cash immediately for a specific reason. Scenarios might include:

• Cash flow gaps: Covering supplier payments or staff wages while waiting for customer payments

• Growth opportunities: Funding new inventory, equipment, or expansion to generate future revenue

• Seasonal fluctuations: Managing costs during quieter periods or building up stock ahead of busy seasons

• Emergency expenses: Handling unexpected costs like urgent repairs or supplier payments

• Working capital: Maintaining daily operations when revenue’s unpredictable

Fund-based credit can be particularly effective for businesses with predictable cash flow. If you’re confident in your ability to repay the facility within an agreed timeframe, it could be worth considering.

When should you consider non-fund-based credit?

Non-fund-based facilities can be useful when your business needs to provide assurances or guarantees without spending money upfront. They can be especially valuable in certain industries and situations:

• Construction and project-based businesses: When bidding for large projects, such as a £2 million contract, you may be required to provide a 10% performance guarantee. Instead of tying up £200,000 in cash, your bank can issue a guarantee, preserving your working capital for other needs.

• Import and export businesses: Letters of credit are often used in international trade. They make sure the supplier will be paid once goods are delivered, and the buyer only pays when the goods arrive as agreed, which provides security for both parties.

• Securing larger contracts: Smaller businesses can use bank guarantees to demonstrate financial backing, thus helping them win contracts that could easily go to bigger competitors.

The primary advantage of non-fund-based credit is that you can maintain your cash flow while offering the assurances your clients and suppliers need. In effect, you’re leveraging your bank’s reputation rather than borrowing their money.

What do banks consider when setting credit limits?

Banks typically look at a variety of factors when assessing how much credit to offer your business:

• Trading history: Most banks prefer to see at least 12-24 months of consistent revenue, although some may consider newer businesses with strong business plans

• Financial performance: Lenders will want to review recent accounts and bank statements to understand profit margins, cash flow, and overall financial health

• Credit history: Both business and personal credit ratings will likely be taken into account, especially for newer businesses that may need to provide personal guarantees

• Security: Asset-backed facilities typically allow for higher limits, as the bank has collateral to recover if repayments fail

• Sector experience: Familiarity with your industry can help banks better assess risk and may influence terms, although this isn’t as important as the financial assessment

• Purpose of funding: Banks will consider how you intend to use the funds, but their primary concern is whether you can afford the repayments

The main goal is to demonstrate that your business can comfortably pay back the debt while maintaining healthy operations. UK regulations require lenders to ensure that any credit provided is affordable and that the business is likely to benefit from the facility, rather than using it to cover existing debts.

How do these facilities affect your balance sheet?

Understanding how your accounts are affected will help you make an informed decision about which facilities to consider using and when.

• Fund-based facilities create both an asset and a liability on your balance sheet. So when you draw down a £100,000 loan, for example, you record £100,000 in cash as an asset and £100,000 in debt as a liability. This will affect your debt-to-equity ratios and other financial metrics that investors and lenders may pay close attention to.

• Non-fund-based facilities are treated differently. These appear as contingent liabilities in the notes to your accounts, rather than liabilities on the main balance sheet. For example, a £500,000 performance guarantee would be disclosed as a potential future obligation, but it doesn’t immediately impact your debt ratios unless the guarantee is called upon and the bank has to pay out.

The difference matters for a few reasons… If you need to keep certain financial ratios for investor requirements or loan covenants, non-fund-based facilities may be more suitable because they don’t directly increase your recorded debt levels. But sophisticated lenders and investors will still consider contingent liabilities when assessing your overall risk, since a large guarantee could become an actual debt if anything goes wrong.

What are the costs and risks involved?

Both types of facilities have different cost structures and risk profiles that you’ll need to consider.

Fund-based costs:

• You’ll pay interest on what you borrow, with rates influenced by the Bank of England base rate and your business’s risk profile. As of 2025, typical business loan and overdraft rates range from about 5% to 15%, but they can be higher for riskier borrowers.

• Arrangement fees are also common, usually 1-5% of the facility amount.

• Some lenders may charge an annual or non-utilisation fee for undrawn portions of the facility.

• Fund-based credit requires regular repayments (of both capital and interest), directly impacting business cash flow.

Non-fund-based costs:

• You’ll pay a commission or fee for guarantees or letters of credit, usually 0.5-3% per annum of the guaranteed amount.

• Arrangement fees and security requirements (such as charges over assets) may also apply.

• Non-fund-based facilities create contingent liabilities – if the guarantee’s called, your business will need to repay the bank, turning the contingent liability into a real debt.

Regardless of the facility type, many lenders also require directors to provide personal guarantees, which means personal assets could be at risk if the business defaults.

To compare costs properly, you’ll need to look beyond the headline rates. For example, a non-fund-based facility might seem cheaper at 1.5% annual commission, but if it helps you secure a profitable contract, the return on investment could be worthwhile.

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FAQs

Can I have both fund-based and non-fund-based facilities with the same bank?

Most banks offer both types and allow customers to use multiple products. Having both can strengthen your banking relationship and could even lead to better terms.

Do non-fund-based facilities affect my ability to get other loans?

Banks consider your total exposure, including contingent liabilities from guarantees, when assessing new applications. A large guarantee facility could reduce your available borrowing capacity for other credit, even if you haven’t drawn any funds.

What happens if a bank guarantee gets called?

You’ll have to repay the full amount to your bank immediately, as the bank will have paid out on your behalf. This is why banks often require security or cash deposits for guarantee facilities, particularly for newer businesses.

How quickly can I access these facilities?

Fund-based facilities like overdrafts can often be arranged within days for existing customers. Non-fund-based facilities usually take longer (around 1-2 weeks) due to extra documentation and legal work.

Can I increase my credit limits over time?

Possibly. Banks will review and may increase your credit limit based on your business performance and needs. Regular reviews with your bank manager can help your facilities grow with your business.

What’s the difference between a guarantee and insurance?

A bank guarantee is a promise by your bank to pay if you default, while insurance is a separate policy that pays out under specific circumstances. Guarantees are typically required by clients or suppliers. Insurance protects your business against various risks.

Do I need security for these facilities?

It will depend on your business strength and the facility size. Smaller facilities for established businesses might be unsecured, but larger or riskier facilities will usually require security, such as property charges or personal guarantees.

How do I know which type of facility I need?

If you need actual cash (e.g. to pay suppliers or staff), you’ll need fund-based credit. If you just need to provide assurances (e.g. for contracts or international trade), non-fund-based facilities are more suitable.