Line Of Credit

What is a Business Line of Credit?

It works a bit like having an overdraft facility or credit card. Interest is only charged on funds that are drawn at the time. These funds can be drawn down, or paid back, at any time within the agreed limits and timeframes. The difference is that unlike an overdraft or credit card, a business Line of Credit is not tied to a bank account or a card provider. That means that there is generally a wider range of lenders who can offer a Line of Credit to businesses.

What are some of the pros and cons of a business Line of Credit?

Pros:

As in life, it’s good to have some money on hand ‘for a rainy day’. A Line of Credit is exactly that money, for a business. It can give the business owner flexibility and reassurance, knowing that they will be able to handle some of the ups and downs without having to go through lengthy loan applications every time an unexpected cost, or opportunity, arises. Because you only pay interest until you draw the money out, if unused, you won’t incur any interest costs. Some of the ways your business might benefit from having a Line of Credit can include:

• Flexibility: The money’s there ready when you need it, so you can respond quickly to opportunities or swiftly handle cash flow issues.
• You only pay interest on the money you use, when you use it: Some lenders may also let you pay off the outstanding balance without additional penalty fees, so you can cut down interest payments even further.
• Control your cash flow: Whether it’s a seasonal dip in trade, an unexpected lockdown, or taking advantage of an opportunity, a business Line of Credit may help keep your cash flowing when you need it.
• Spend it on the business expenses of your choice: Unlike some business loans, a business Line of Credit gives you the freedom to choose how and when you spend the money, depending on the size of the credit facility.
• Help build a positive credit history: By using your business Line of Credit responsibly, you build trust with your lender and in some cases may improve your business credit score.

Cons:

As with any loans, the terms and conditions can vary a lot between providers, so it’s important to read and understand these when applying. Particularly pay attention to fees (some providers may not charge them), and if there are any daily limits on accessing your funds. You should also check whether your lender requires collateral, as business lines of credit come secured and unsecured. While a secured Line of Credit may offer you a lower interest rate, it can also tie up assets. So, some of the cons of a business Line of Credit are:

• Fees: Check for set-up fees, maintenance fees and fees for withdrawals, with some providers these can negate the benefit of a low interest rate.
• Qualifying can be demanding: Applying for a business Line of Credit will often involve providing detailed financial and trading history, guarantees, business documentation and sometimes a yearly review.
• Debt risks: Like any loan, a business Line of Credit is a form of debt, and debt can come with its own particular set of risks. Generally the person responsible for paying the outstanding debt will be the business owner.

How can I use a business Line of Credit?

As we’ve already outlined, what you use your Line of Credit for is generally up to you. But it’s generally a fund which is kept on hand to handle unforeseen expenses or opportunities. Interest can build up if you don’t pay back your drawn down funds, that’s why a business Line of Credit is often used for short-term things, like:

• Increasing stock levels
• Covering unexpected costs
• Taking advantage of a business opportunity
• Paying bills while awaiting payment from a customer
• Advertising or marketing projects
• Hiring seasonal labour
• General operating expenses

Will a Line of Credit affect my credit rating?

As we mentioned above, a Line of Credit used properly could improve your credit score. However, like any loan or debt, if it goes unpaid, it can have a negative effect on your rating. To learn more about what can impact your credit score, please refer to the MoneySmart website here.

What features can be considered when comparing lines of credit?

• Fees: Some lenders may charge a one-off set up fee, that’s easy to calculate into your costs. Some though, may charge an ongoing annual fee and a fee each time you draw down money from your Line of Credit. You’ll need to assess these fees and compare the total cost across lenders.
• Interest rate: This will vary across lenders and can be dependent on your business circumstances. You should also consider whether the interest rate offered is variable or fixed.
• Security: Some lenders may require your Line of Credit to be back by security, a secured loan will often offer a lower interest rate.
• Loan amount: Make sure that the lender is prepared to lend you the amount that you require. Different providers have different limits, both minimum and maximum.
• Documentation: Ensure that your business documentation is as required. A low-doc loan, while sometimes possible, could come at a higher interest rate.

Looking for a business Line of Credit? Look no further, compare from Valiant’s range of providers.

At iSelect we’ve partnered with Valiant to make it easy for iSelect customers to find a business Line of Credit that could suit their business.* With over 80 lenders across Australia, Valiant can manage the process of finding, comparing and applying for a finance solution as well as settling funds. Get started comparing business finance products online today.