Business line of credit

What is a business line of credit?

A business line of credit is different to a traditional business loan. Instead of receiving the loan amount as an up-front lump sum payment, you are approved for a specific credit limit, which you can then access as you wish.

How does a line of credit for business work?

You'll only be responsible for paying back the funds you actually use, plus any other fees charged by the lender. Moreover, your lender will only charge you interest on the amount borrowed, not the entire amount you're approved for. In this way, a line of credit loan functions more like a credit card than a normal business loan, but generally offers a lower rate than a traditional credit card.

Depending on the lender, you may also be required to put up collateral as security for your line of credit, although many lenders also offer unsecured line of credit loans.

A business line of credit can give you greater control and flexibility over your funds, as you're able to borrow only what you need and pay back the facility at your own pace. This added flexibility is what makes a business line of credit valuable and practical for business owners.

What to look out for with a business line of credit

• The interest rate. Make sure you understand whether your lender charges a variable or fixed interest rate. Also, keep in mind you'll only be charged interest on the amount you actually borrow, not on the amount you're initially approved for.
• The comparison rate. To help you compare options more accurately, the comparison rate takes into account not only a lender's interest rate, but also the other fees that are charged.
• Fees and charges. Usually, a business line of credit includes one-off fees such as application and establishment fees. They also may include other fees such as annual charges, ATM and transaction fees.
• Monthly repayments. Business lines of credit have no minimum monthly repayment as long as any interest, charges and other fees are paid every month.
• If it's secured or unsecured. Many business lines of credit may need to be secured, meaning you may be required to put up any business or home equity as collateral for your loan.
• The minimum loan amount. When applying for a business line of credit, keep in mind that some lenders may require a minimum amount to be borrowed.

Is a business line of credit right for me?

A business line of credit is a flexible and popular loan option for businesses of all sizes, but it's important to know if it's the best choice for you. Consider the following to help determine if a business line of credit, or a traditional business loan, is suitable for your business:

Business line of credit

You need ongoing access to funding, such as to help manage cash flow, or in case of unexpected costs or expenses. A business line of credit is better to suited to businesses that need intermittent or occasional access to additional funding, but are in the position to repay the funds quickly. The interest rate on a line of credit is generally higher than on a normal business loan, and you will be expected to repay the funds on a short-term, often monthly, basis, not over the course of a longer loan term, like with a business loan.

Business loan

You need to make an immediate or expensive purchase, such as new equipment, property orinvestment. If you're planning a major purchase or expense in the near future, a business loan may be a better option. You will be given the full loan amount up-front, which can then be used to cover the purchase or expense, and then have an agreed loan term over which you repay the cost of the loan.

It may be easier to budget for and manage the regular repayments of a business loan than it is with a business line of credit loan.

Things to keep in mind before applying for a business line of credit

Keep in mind the following factors when comparing your options to find the line of credit loan that is right for your business:

• Can my business afford it? This should always be the main factor in your decision. Before taking out any type of debt, make sure to calculate all associated costs and make sure your business's cash flow is able to take on new monthly repayments.
• How much can I borrow? Different lenders offer varying minimum and maximum loan amounts. However, the particular amount you're approved for depends on several factors that may include past credit history, requested loan amount, cash flow, assets and liabilities.
• When will I receive my line of credit? Make sure the lender you choose is able to provide your funds when you need them. Otherwise, you'll be wasting lots of time, resources and money.
• How much will it cost me? Besides the interest rate, check to see what fees you'll be charged, including one-off fees such as application, line and establishment fees. They may also include ongoing fees such as loan service and annual fees.
• How much will my repayments be? Your monthly repayments are not fixed and depend on how much you would like to pay down. As long as you pay interest and other fees for the month, lenders provide great flexibility on how much of the balance you want to pay back.

What are my other options?

If a business line of credit doesn't sound suitable for your business, there's a number of other financing options you can compare. These include:

Alternatives to a business line of credit

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Name	Product	Min. Loan Amount	Max. Loan Amount	Loan Term	Upfront Fee	Filter Values
Waddle Invoice Finance		$10,000	$4,000,000	From 1 month	$0		Apply to borrow up to $4 million against your unpaid invoices and receive your approved funds within 48 hours.	Go to site More Info	Compare	loading Fetching your data...
Timelio Invoice Finance		$10,000	$100,000,000	Up to 4 months	$0		Get up to 100% of the value of your invoices without having to wait for customer payments, and with no minimum turnover or operating history required.	Go to site More Info	Compare	loading Fetching your data...
Thornmoney Invoice Finance Exclusive		$10,000	$5,000,000		0.5% to 1.25% drawdown fee		You'll receive a rate tailored to you, and have up to 90% of your invoices funded. A 0.5% p.a. to 1% p.a. establishment fee applies, however this will be waived if you apply through Finder until 31 March 2022.	Go to site More Info	Compare	loading Fetching your data...
ScotPac Invoice Finance		$10,000	$150,000,000	From 1 year	No set amount		Improve your business cash flow by financing your outstanding invoices. No minimum trading history required, but minimum 12 - month term and $10,000 in invoices.	Go to site More Info	Compare	loading Fetching your data...
ScotPac Selective Invoice Finance		$10,000	$1,000,000	1 to 3 months	$500		Finance your unpaid invoices on demand with terms of 1 - 3 months. 95% of invoice is paid upfront, with no minimum trading history required.	Go to site More Info	Compare	loading Fetching your data...
Earlypay Invoice Finance		$50,000	$15,000,000	From 1 month	No set amount		Access a revolving line of credit that grows in line with your accounts receivable. Funding available from $50,000 to $15,000,000+.	Go to site More Info	Compare	loading Fetching your data...
Octet Invoice Finance		$100,000	$10,000,000	1 month to 2 years	No Set Amount		Convert up to 85% of your company's receivables into cash flow. The value of your receivables need to be worth at least $250,000 to be eligible.	Go to site More Info	Compare	loading Fetching your data...
Earlypay Trade Finance		$20,000	$15,000,000	1 month to 15 years	No set amount		Get finance for 100% of your outstanding supplier invoices. Borrow from $20,000 to $15,000,000 with Earlypay.	Go to site More Info	Compare	loading Fetching your data...

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Things to avoid with a business line of credit

• Borrowing more than you can afford. Especially with business lines of credit, you may easily borrow more than your business requires or can afford. Also, just because you're approved for a certain amount doesn't mean you should use it all. Lastly, never request a loan amount more than what you actually need. By doing this, you can find yourself quickly getting into too much debt and, with it, put your business in financial distress.
• Taking too long to repay. With business lines of credit, you're not required to pay back the amount you borrowed within a fixed period. Rather, you have the option to pay only minimum monthly charges. Whatever balance is left unpaid, interest and charges accrue. This means that the longer you wait to pay back your unpaid balance, the more expensive it gets. Avoid this by paying down your unpaid balance as much as financially possible.

Other questions you may have

What types of ongoing costs are there?

Lenders usually charge an annual fee, transaction fees and interest. However, ongoing costs associated with a business line of credit differ from lender to lender.

What documents do I need to apply?

Make sure to have on-hand your identification, proof of income, business financial statements and other personal- and business-specific information such as address, ABN, how long you've been in business, etc.

How long does a business line of credit last?

There's usually no limit. Most often, it would be valid as long as you hold the original credit account.

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

A business overdraft can be added to business banking account and lets the customer access additional funds (up to an approved limit) once the account has run out of funds. Depending on the lender and type of account, you may be charged overdraft fees, or may have to pay interest on the overdraft amount used. In contrast, a line of credit is available to be used at any time, and is accessed separately to an existing banking account.