As a business owner, maintaining healthy cash flow can be a constant balancing act.
Access to flexible funding can be extremely useful for covering day-to-day operational costs and supporting long-term business growth.
One option many business owners turn to is a business line of credit – a revolving facility offering ongoing access to funds when you need them most.
Unlike a traditional term loan that provides a single lump sum repayable over a set period, a business line of credit loan functions more like a credit card – but without the high interest rates. You draw funds as required and only pay interest on what you use. However, as with any funding option, a line of credit loan isn’t suitable for every business, so careful evaluation is essential.
Let’s explore business line of credit loans, to help you decide whether they’re a good fit for your needs.
How a Business Line of Credit Works
A line of credit for business is a revolving credit facility set up between a company and a lender.
This system lets you access money as needed up to a set credit limit. Instead of receiving a single lump sum, you draw funds only when you need them and pay interest solely on the amount you use.
As you repay the borrowed funds your available credit replenishes, giving you a revolving source of capital.
This structure provides ongoing financial flexibility for managing cash flow, covering expenses or pursuing new growth opportunities.
Secured and Unsecured Options
Business line of credit lenders can offer secured or unsecured options.
Secured facilities usually require collateral such as property, equipment, inventory, or other business assets. This collateral reduces the lender’s risk, which can make secured credit easier to qualify for. You may also benefit from better terms and higher borrowing power.
Unsecured options rely on the strength of your business’s financials (as opposed to collateral) and typically carry higher costs and tighter lending conditions.
The more secure the facility, the more competitive the interest rate is likely to be.
In Australia, businesses can choose from banks, fintech lenders, credit unions, and specialised non-bank lenders offering various line of credit options.
Working with a commercial loan broker can streamline the comparison process and help you secure the most suitable line of credit for your business.
When a Business Line of Credit Might be the Right Choice
A business loan line of credit is ideal when your business faces fluctuating cash flow or irregular expenses.
Common uses include:
1. Covering short-term cash shortages
A business line of credit can help you manage temporary gaps between incoming revenue and outgoing expenses (such as payroll, rent, or supplier payments) without disrupting day-to-day operations. This can be particularly useful for seasonal businesses such as agricultural businesses or tourism operators that experience significant fluctuations in revenue throughout the year.
2. Managing unexpected expenses
A revolving line of credit provides quick access to funds, helping to prevent operational disruption when unexpected costs arise, such as equipment repairs.
3. Taking advantage of growth opportunities
A business line of credit loan provides the funds needed to invest in growth opportunities as they arise. Think expanding operations, launching a new product, or entering a new market. As a revolving source of funding, it also allows you to move quickly, without having to apply for a new loan each time.
Benefits of Business Line of Credit Loans
There are four main benefits to choosing a line of credit loan:
1. Pay Only for What You Use
With a business line of credit, you only incur interest on the funds you draw, not the total credit limit. This makes it a cost-effective option for managing short-term cash needs, allowing you to borrow and repay as your business requires without paying for unused credit.
2. Continuous Access to Funds
Once approved for the line of credit loan, you can draw and repay funds repeatedly without the need to reapply for a new loan.
3. Flexible Repayment Terms
Most business line of credit lenders allow you to repay borrowed funds on a schedule that suits your cash flow, rather than following a fixed, rigid timetable. They also often allow you to repay early without penalty. This flexibility makes it easier to manage short-term financial obligations and can help to reduce interest costs when balances are paid down.
4. Wide Range of Lenders Available
Business lines of credit are offered by a wide range of lenders, including traditional banks, credit unions, and online financial institutions. This diversity gives you more options to find competitive interest rates, favourable terms, and lending criteria that meet your specific needs.
Potential Drawbacks of Business Line of Credit Loans
Before choosing a business line of credit, it’s important to consider some of the key limitations and risks associated with this type of financing.
1. Higher Interest Rates
Lines of credit (especially unsecured ones) often carry higher interest rates than traditional loans, which can increase borrowing costs over time.
2. Variable Interest Rates
Many lines of credit have variable rates, meaning your interest payments can rise if market rates increase.
3. Risk of Over-Borrowing
While convenient access to funds is helpful, it can encourage businesses to borrow beyond their needs, which can lead to mounting debt and financial strain.
4. Potential Impact on Credit Score
Excessive use of your line of credit or missed payments can impact your business’s credit score, potentially limiting your ability to secure financing in the future.
What Lenders Look For
When applying for business line of credit facilities, you’ll typically need to provide documentation proving your financial stability.
Requirements may differ by lender, but usually include:
- Business financial statements
- Bank statements
- BAS statements
- Proof of trading history
- Credit reports
- Details of assets (if applying for a secured facility)
With access to a broad network of lenders, a professional broker can often secure more competitive rates and better terms than a business could negotiate alone.
A broker can also customise finance solutions and facilitate access to the best business line of credit for your unique needs.
How to Improve Your Business Line of Credit Application
A well-prepared business line of credit application can significantly improve your chances of approval.
Here are some practical steps when applying for a business loan:
1. Demonstrate Stability
Lenders want evidence of consistent revenue, even for seasonal businesses. Be sure to provide supporting documentation that shows your business’s long-term performance and stability.
2. Improve Your Credit Profile
A strong business credit score can help you qualify for higher credit limits and better terms. Paying bills on time and reducing existing debt will strengthen your position.
3. Get Your Financials in Order
Accurate and up-to-date financials demonstrate credibility with lenders. Ensure your balance sheets, profit-and-loss statements, and cash flow reports are current to demonstrate that your business is well-managed and financially responsible.
4. Compare Lending Options
No two facilities are the same. Interest rates, fees, redraw flexibility, collateral requirements, and repayment terms can vary significantly, so it’s important to conduct thorough due diligence before selecting a loan facility.
Is a Business Line of Credit Loan Right for You?
A business line of credit is a popular financial tool for Australian businesses.
Whether you’re a small business just getting started or a well-established company, the flexibility and convenience of a revolving credit facility make it an attractive option.
However, with a wide range of lenders offering different structures, rates, and terms, understanding your options and how they align with your business needs is vital.
Next steps: Consult the experts
Ledge Finance has decades of experience helping Australian businesses secure tailored finance solutions.
Our brokers are independent and have access to a wide network of lenders, so we can secure competitive rates and negotiate favourable terms.
To explore your options or to review your current loans, contact Ledge Finance today.