Business Line of Credit
A business line of credit allows a business to withdraw an agreed amount of funds when it needs to, and interest is charged on the amount withdrawn.
Pros
- Fast application
- Convenient access to credit
- Interest is only charged on amount withdrawn
- No obligation
Cons
- Interest can be expensive
- May have high rates
- Not useful for large purchases
A business line of credit allows you to access funds when you choose, without needing approval from your lender. Each time you withdraw from your available credit, you will be charged interest on the amount borrowed.
You can repay this in full to avoid interest charges, otherwise your lender will specify a minimum payment amount.
You can still withdraw the remaining amount up to the agreed limit even if you have an unpaid balance, and can withdraw the full amount once the balance has been cleared.
Business lines of credit facilities are popular with business owners who want access to cash when they need it, don’t want to be locked into a long-term loan, and would like flexible funds which don’t involve paying interest on the unused amount.
A business line of credit will often require set-up and ongoing maintenance fees. Check your lender’s terms before applying to ensure you aren’t paying more than your business can afford to.
A business line of credit is available secured or unsecured from both banks and non-bank lenders. Unlike a secured line of credit, an unsecured line of credit means you do not have to offer collateral or assets as security on the loan.
To apply, you’ll need to provide a lender with sufficient business documentation to make an assessment. This might include details about how long your business has been operating, your monthly revenue, or other information depending on the individual lender’s approval criteria.
Most lenders will be able to provide options if you have been trading for 12 months, have an Australian Business Number (ABN) and are registered for GST.
The minimum you will need to provide a lender with is your ABN and business bank statements. You may also be asked to provide a profit and loss statement, or access to your Australian Tax Office (ATO) Portal.
A business line of credit can range from $5,000 up to $5,000,000. As each lender will have their own minimum and maximum limits, it’s likely that you’ll be able to fill out a pre-approval form with a lender to determine how much you are eligible for.
You may need to pay a line fee. A line fee is a fee you pay to ensure the funds are always available. You will still pay the monthly line fee whether you draw the funds or not, separate to any interest accrued on the amount you withdraw.
You may need to pay an application fee, which is usually a percentage of your total credit limit. This is usually based on the approved credit limit. On a $50,000 line of credit application, the application fee could be anywhere up to $1,500.
The general term for a business line of credit is between 3 – 36 months. However, depending on your lender, you may have access to a revolving line of credit which doesn’t have a maximum term. If you apply for a revolving line of credit, your lender will review this at a set period (e.g. two years into a three-year line of credit)
A business line of credit is a flexible type of business finance that is similar to an overdraft. Like a small business loan, you can use it for any business purpose, and usually has a term of 3 – 12 months, however you are only charged interest on the amount you draw.
The important thing to note about a line of credit is that you may have to pay for your facility – including set-up fees and possibly ongoing charges – whether or not you use it.