- A business line of credit provides flexible access to funds up to a set limit. You only pay interest on the amount you use. As you repay, your available balance replenishes and you can reuse it without reapplying.
- A line of credit can help businesses cover overheads, manage cash flow, pay for large expenses, and fund growth initiatives.
- The application process can be quick and straightforward, depending on your business circumstances and lender requirements.
When it comes to the challenges that Australian SMEs 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.
Here's how a business line of credit works and what to consider before applying.
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.
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How does a business line of credit work?
Lines of credit are typically revolving. 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 you get access to a line of credit of $10,000 for a period of 12 months.
In the first quarter, you draw $3,000 from it to buy inventory (and pay interest only on that amount). You now only have $7,000 available.
By the end of the quarter, you repay $2,000, so your available credit goes up to $9,000. You can continue to use the credit until the 12 months are up, as long as you don't exceed the credit limit of $10,000.
Is a business line of credit right for you?
A line of credit can be a useful option if your business needs ongoing access to funds, rather than a one-off lump sum.
It may be suitable if you:
- Experience seasonal fluctuations in revenue
- Need to cover expenses while waiting for customer payments
- Want flexibility to respond to unexpected costs
- Need working capital available without applying for a new loan each time
For example:
A construction business waiting on progress payments
A builder has completed work but won't receive payment for another 30 days. A line of credit can help cover supplier invoices, wages, and subcontractor costs while waiting for payment.
A retailer preparing for a busy period
A retailer wants to buy additional stock before a seasonal sales period but doesn't want to borrow a large amount upfront. A line of credit allows them to access funds only when required.
Keep in mind, though, that a line of credit may not be the right fit for every situation. If you need funds for a specific purchase, like heavy machinery or a car, a dedicated finance product may be more suitable.
What can I use a line of credit for?
One of the biggest perks of taking a line of credit loan is the convenience and flexibility. 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
- Buy stock in bulk to access discounts
- Fund business growth and acquire new customers
- Manage tax debt
How much can I borrow for a line of credit?
This will depend on factors like your lender's policy, creditworthiness, revenue and cash flow, and business plan. With Valiant, though, you can access $5,000 to $1,000,000.
Businesses with stronger revenue, consistent cash flow and an established trading history may be able to access higher limits.
What are the pros and cons of a business line of credit?
A line of credit may not be the right fit for every company, so it's important to carefully consider the benefits and the drawbacks.
Pros of a business line of credit
- Flexible access to funds. You can draw funds when you need them, rather than taking out a new loan every time a cash flow gap appears.
- Only pay interest on what you use. Unlike a traditional loan, you generally won't pay interest on funds that are sitting unused.
- Helps manage short-term cash flow gaps. A line of credit can help cover expenses like supplier payments, wages, stock purchases, or unexpected costs while you wait for incoming revenue.
- Can help you act quickly when opportunities arise. A line of credit can give you access to funds when you need to take advantage of opportunities, like buying discounted inventory or taking on a new project.
Cons of a business line of credit
- Fees may apply even if you don't use the funds. Some lenders charge facility or line fees for keeping the credit available, so it's important to understand the full cost structure.
- May require a strong financial history. Some lenders prefer businesses with established trading history, consistent revenue, and healthy cash flow.
- Larger limits may require security. If you need a higher credit limit, lenders may ask for assets or a director's guarantee.
- Can become expensive if used for long-term borrowing. A line of credit is designed for flexible, ongoing access to funds. For a large one-off investment, a term loan or dedicated finance product may be more suitable.
How much does a business line of credit cost?
The cost of a business line of credit depends on factors including the lender, your financial position, and whether the facility is secured or unsecured.
Common costs may include:
- Interest rates: You generally only pay interest on the amount you draw, rather than your total approved limit.
- Facility fees: Some lenders charge an ongoing fee for keeping your line of credit available, even if you don't use it.
- Establishment fees: An upfront setup fee may apply when your facility is approved.
- Drawdown fees: Some lenders may charge a fee when you access funds.
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.
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 may have the option to provide security, which could help you access more competitive rates depending on the lender and your circumstances.
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. Get a quote today to chat with a lending expert and find a business loan that works for your business.
What's the difference between a line of credit and a term loan?
The main difference between a line of credit and 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 and short-term cash flow gaps. Term loans may be more useful for a large, one-time expense, like purchasing a car for your business or opening a new office space.
What do lenders look for when approving a line of credit
Lenders typically assess factors such as:
- Revenue and cash flow: Consistent income helps demonstrate your ability to manage repayments.
- Time in business: Many lenders prefer businesses with an established trading history.
- Credit history: Your personal and business credit profile may influence your options.
- Existing debts: Lenders consider your current financial commitments.
- Security: Larger facilities may require assets or a director's guarantee.
How do I apply for a business line of credit?
First, you’ll need to have your paperwork ready. Lenders will usually ask for:
- ABN/ACN: Active registration, usually for a minimum of 6 to 12 months.
- Bank feeds: 6 months of recent business bank statements.
- Financials: Recent BAS statements or tax returns.
- Identification: Director ID and standard KYC verification documents.
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.
FAQs
Do you pay interest on an unused business line of credit?
Generally, no. You'll usually only pay interest on the amount you draw, not your full approved limit. However, some lenders charge ongoing facility or account fees, even if you don't use the funds.
Can a startup get a business line of credit?
Yes, although it can be more challenging. Many lenders require a minimum trading history and assess factors like revenue, cash flow, and credit history before approving a line of credit.
Is a business line of credit secured or unsecured?
It can be either. A secured line of credit uses an asset as security and may offer higher borrowing limits or lower rates, while an unsecured line of credit doesn't require collateral but may have stricter eligibility criteria.
How quickly can you get approved for a business line of credit?
Approval times vary between lenders, but some businesses can be approved and funded within 24 hours. Having your financial documents ready can help speed up the process.
Is a business line of credit the same as an overdraft?
No. While both can help manage cash flow, a business line of credit is a standalone credit facility that lets you draw funds up to an approved limit, while an overdraft is linked to your business bank account and lets you spend more than your available balance. Learn more about the differences between a business line of credit and an overdraft.
