Line of Credit overview
What Is A Business Line Of Credit?
A line of credit is a loan facility that can readily be drawn down or repaid back at any time within a pre-determined limit. This key feature means a line of credit behaves much like a credit card or an overdraft, but rather than being linked to a card or a bank account, it is its own standalone facility.
Like a credit card or an overdraft, interest is only charged on any amount that is drawn and the funds can be drawn down or repaid back at any time.
Given a line of credit is a standalone facility, there are a wider number of lenders who are able offer line of credit facilities to businesses when compared to a credit card or an overdraft.
✓ Stabilises Cashflow ✓ Pay For Use ✓ Business Flexibility ✓ Build Credit ✓ Builds Relationships ✓ Flexibility
X Fees X Tougher Criteria X Risk
Benefits Of A Business Line Of Credit
The key benefit of a line of credit is the flexibility it can give your business. It is fantastic having the peace of mind in knowing that you have funds at the ready to be drawn to help smooth out working capital ups and downs and taking advantage of new growth opportunities that may pop up. With a line of credit, you only pay interest on the funds you use too.
Given the nature of line of credit facilities there are a greater number of lenders with line of credit offerings out in the market. This means there is much more scope to shop around and find the lender that provides the best terms or the facility that best suits your business.
✓ It Can Help To Even Out Your Cashflow It can be difficult to keep your cashflow steady. Seasonal fluctuations, unexpected costs and opportunities to ramp up business can negatively impact your cashflow. A business line of credit helps to balance your cashflow, providing you with the cash you need when you need it.
✓ You Only Pay Interest On The Amount You Use A business line of credit gives you greater flexibility around how much you borrow, and therefore how much interest you pay. Unlike a traditional business loan, you only pay interest on the amount you use, and depending on the lender, you may be able to pay off the balance without facing any penalties.
✓ Provides You With Greater Adaptability Your businesses line of credit can ensure you are prepared to take advantage of opportunities. Rather than going through the application process of a traditional business loan, a line of credit is available to you when you need it.
✓ A Line Of Credit Helps Build Lender Relationships Good lender relationships will be helpful in securing funding in the future. By securing a line of credit and using it responsibly you are not only instilling trust in the lender, but you are improving your credit score, both of which will help you with future finance applications.
✓ Lines Of Credit Are Flexible A business line of credit doesn’t require that you give a reason for the loan. You are free to spend this money on business expenses of your choosing, which makes it more flexible than a traditional business loan.
Drawbacks Of A Line Of Credit
Line of credit facilities can all come with very different terms, so be sure to understand and be across all the terms and conditions of any line of credit you are applying for.
The key things to look out for are the fees for the line of credit facility and then the usage terms. For example, some lenders may only charge interest and no upfront or establishment fees. Some other facilities may let you access the funds electronically once per day.
Line of credit facilities can come in both secured and unsecured forms. If security or collateral is provided to back the facility, this will help you get a lower interest rate, however may not be ideal if you don’t want to have any assets locked up as collateral.
X Lines Of Credit Come With Fees One of the biggest drawbacks of a business line of credit is the fees associated with both setting up and maintaining it. While the interest rate may be low, it is important you take into consideration the fees that come with maintenance and withdrawals.
X They Can Be Difficult To Qualify For A business line of credit often requires financial statements, bank account information, security, a long trading history, a director’s guarantee, business documents and more. Many lenders will also require you undergo a yearly review to maintain your businesses line of credit.
X All Debt Carries Risk All debt carries risk, and a business line of credit is no exception. If the line of credit is used incorrectly, it can put a business into even more debt and if the business does not succeed, often the line will need to be paid by the business owner.
How To Apply For A Line Of Credit
Applying for a line of credit is similar to applying for most other loans in that you likely have to provide business bank statements in addition to business financial statements.
When applying for a line of credit be sure to ask for any application fees (if there are any) as well as if there are any other ‘facility fees’. This could include an ongoing fee charged by the lender for having the fund ‘in reserve’ for you in the form of the line of credit. Be sure to always ask for a thorough explanation of all of the terms and conditions included in your line of credit agreement too.
Eligibility is impacted by:
- Credit Score
- Time In Business
- Annual Revenue
- Your Security
- Bank Statements
- The Purpose Of The Loan
How To Apply
Applying for a business line of credit is a straight forward process. Use our free loan wizard to see which lenders and loans are best suited to your business or give us a call on 1300 780 568.
From there one of our business lending specialists can discuss your specific requirements, source the documentation you need to apply, and finalise your funding.
The Best Ways To Use A Line Of Credit
Line of credit facilities are best kept as reserve funds to help smooth out the ups and downs of cash flow over time. Whether the funds are used to pay for unexpected expenses or fund a new growth opportunity, that is entirely up to you.
The only thing would be to be careful of where your limit is and to only use the line of credit when you are comfortable that you will be able to pay back the amount you draw down in the future so you aren’t stung with large interest bills.
A business line of credit is primarily used to access short-term funding. Some common uses of this funding include:
- Financing payroll
- For operational expenses
- To increase inventory
- Unexpected expenses
- For seasonal working capital
- Marketing or PR opportunities
- Paying bills while waiting for receivables
How To Choose The Right Lender
The best lender for you is determined by your specific business needs. When reviewing your lender options, you will want to consider a few factors:
Their line of credit interest rates Comparing interest rates will be one of your top priorities. The LOC interest rate offered by each lender will be impacted by your business circumstances, whether the interest rate is variable or fixed, and whether or not you need a secured or unsecured facility.
The lender’s line of credit fees Many lenders will charge one off fees that you will need to factor into the total cost of your financing. These can include setup fees, annual fees and transactional fees.
Whether they require security Some lenders will require that you secure your line of credit with a property or assets. The interest rate will also differ depending on whether your loan is secured.
The amount they will lend Every lender will have their own minimums and maximums that they are willing to lend. Depending on how much you are wanting to borrow this could narrow your options.
Required documentation Some lenders will offer low doc line of credit options and a faster application process. This could provide you with access to funds faster, but the interest rates may be impacted.
If you want an easier way to narrow in on the right line of credit for your business that takes into account all of the above factors and compares over 70 lenders, use our free loan wizard.
It takes just 2 minutes to compare your options online. From there you can start your application or speak to one of our lending specialists.
Frequently Asked Questions
Are there any line of credit fees? Depending on the lender, there may be some line of credit facility fees. Some of the common fees include an application fee, monthly account fees, and transaction fees.
What do I need to apply? The documentation required differs between lenders, but most will require that you provide proof of income, financial statements, your ABN, and any specific information about your business.
What is the average line of credit interest rate? The interest rate on a line of credit differs for every business. It is dependent on the lender, your cashflow, whether it is secured or unsecured, how much you are borrowing and more. Line of credit interest rates usually start around 9%.
How long can I access my line of credit? Business lines of credit are ongoing. There is typically no cut-off date. A review will be required occasionally and depending on the lender this can occur as often as once a year or as little as every 3 years.