What is a business line of credit and how does it work?

When it comes to the challenges that Australian SMEs typically face, managing cash flow is often up there. From seasonal fluctuations to unexpected expenses and delayed client payments, maintaining a steady flow of funds isn't always easy.

That's where financing solutions like a business line of credit can be helpful. By providing business owners with funds when needed most, this type of loan can help bridge financial gaps and keep operations running smoothly.

Read on for everything you should know about getting a line of credit for your business.

What is a line of credit?

A business line of credit gives you access to funds up to a set limit, which you can tap into whenever you need to, only paying interest on the amount that you use [1]. The funds are available to you for a specific period of time, within which you can withdraw whatever amount you need.

How does a business line of credit work?

As we mentioned before, with a line of credit, you get access to a pool of funds that you can borrow from as needed.

Lines of credit are typically revolving. This means that as you make repayments (either automatically or manually), your available balance goes back up, so you can keep using it when needed without having to reapply [2].

So, let's say a small business gets offered a line of credit of $10,000 for a period of 12 months. In the first quarter, they draw $3,000 from it to buy inventory (and pay interest only on that amount). They now only have $7,000 available.

By the end of the quarter, they repay $2,000 and, as such, their available credit goes up to $9,000. They can continue to use the credit until the 12 months are up, as long as they don't exceed the credit limit of $10,000.

Common uses for a line of credit

One of the biggest perks of taking a line of credit loan is the convenience and flexibility (more on this soon). There are many ways you can use a line of credit, including to:

• Cover overheads, particularly during off-season periods
• Pay for large upfront job costs
• Cover day-to-day operational costs
• Invest in employee training
• Buying stock in bulk to access discounts
• Fund business growth and acquire new customers
• Manage tax debts

How much can you borrow for a line of credit?

This will depend on factors like your lender's policy, your creditworthiness, your revenue and cash flow, and your business plan. With Valiant, though, you can access $5,000 to $1,000,000.

The pros and cons of business line of credit loans

A line of credit may not be the right fit for every company, so it's important to carefully consider the benefits, as well as the drawbacks:

The pros

• You can use it whenever you need. This is particularly beneficial for businesses going through cash flow issues or needing to cover unexpected expenses.
• You pay interest only on what you borrow. If you're short on working capital, this can make a massive difference.
• There are several unsecured loan options available. Not having collateral doesn't have to be an obstacle, since you can go for an unsecured line of credit. Keep in mind, though, that this option may come with higher interest rates.
• It helps improve your business credit score. Using your credit mindfully and repaying on time are great ways of raising your credit rating. In the future, this can help you access other types of business financing.
• The application process is quick and hassle-free. Compared to traditional loans, applying to a line of credit tends to be faster—great if you need your funds sooner rather than later.

The cons

• You may need a longer business history. Having a track record of financial stability will likely work in your favour.
• It could be subject to fees and charges. Things like setup fees, monthly maintenance fees, and drawdown fees can easily add up and inflate the cost of a business line of credit.
• Larger loans might need collateral. Larger loans equal higher risk for the lender, so they'll want to have some sort of security in case you fail to repay.
• Lower credit may mean higher rates. Due to the flexible nature of lines of credit, lenders may charge higher interest rates as a way to offset the increased risk.
• You may be asked for a director’s guarantee. This means that you, as an owner, will be personally liable for the debt if the company fails to meet its obligations under the loan agreement.

Can a new business get a line of credit?

A new business can get a line of credit, but it may be more challenging than for more seasoned companies.

One thing to consider is that certain lenders require a minimum period of business operation. So, if your business has only existed for one or two months, you may simply not be eligible for financing.

If you do meet the minimum operation time, there are some things you can do to increase your chances. For example, if you own property, you can use it as security. This will give the lender more peace of mind, knowing that there's a backup plan in case you were to default on your loan.

Or, you may consider other funding options. A business overdraft, for example, lets you withdraw funds even after your account balance has reached zero. And, just like a line of credit, you only pay interest on what you withdraw.

Alternatively, you can start by getting a business credit card and working on building your financial profile until you're eligible for a line of credit.

What's the difference between a line of credit and a business credit card?

A line of credit works similarly to a business credit card—you withdraw funds whenever necessary and only pay interest on what you use.

However, credit cards are often unsecured. You can't use an asset as collateral, which will likely mean high interest rates.

With a line of credit, you have the option to go for a secured loan. The amount of interest to be paid is likely to be lower, and you may end up being able to borrow money than with a credit card.

This isn't to say that credit cards are never a suitable solution. They can come in handy for short-term business spending and smaller day-to-day purchases (provided you can comfortably pay off the balance at the end of each month).

The most important thing is that you consider your financing needs and goals and choose a solution accordingly.

If you're not sure where to start, Valiant can help. Our team is well-versed in everything business finance, helping Aussies in all sorts of industries, from hospitality and retail to construction, medical, and more.

Fill out our form to get started and chat with a lending expert to find a great business loan that works as it should.

What's the difference between a line of credit and a term loan?

The main difference between a line of credit versus a term loan is that the former is a pre-determined borrowing amount that you can use, repay and use again (up to a set limit), while the latter is a lump sum payment for one-time use, with a fixed repayment schedule.

A business line of credit is a better solution if you need flexibility—perhaps if your business goes through seasonal ups and downs or you need to bridge short-term cash flow gaps.

Loans, on the other hand, may be more useful for a large, one-time expense—for instance, if you need to purchase a car for your business or open a new office space.

How to apply for a business line of credit

The application process for a line of credit is typically simple and requires minimal paperwork. But if you don't deal with business loans on a daily basis, it can still be overwhelming. The good news is, we do.

Valiant can help you secure a business line of credit in as little as 24 hours. Rather than providing the loans directly, we connect you to lenders that offer financing solutions tailored to your needs. Then, we handle the application process and settle funding on your behalf.

Our platform compares finance from over 90 lenders, both banks and non-banks, so there's a wide range of options to choose from. Ready to get started? Get in touch today.

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References

1. https://business.gov.au/finance/funding/apply-for-a-business-loan
2. https://www.rba.gov.au/publications/rdp/2013/2013-13/short-term-business-finance.html