A business line of credit: Explained

Are unexpected cash flow gaps causing stress and worry for your small business? A business line of credit might be the solution.

What is a business line of credit?

A business line of credit is a facility that allows a business to draw down on an agreed amount of funds over a set period of time.

Typically, the line of credit will be for a specific amount, say $20,000. A lender will agree to give the borrower access to these funds for a particular term, which is usually a year.

Drawing down

As a small business owner, you can draw down from the facility whenever you choose, and also withdraw an amount of your choice. (Draw down simply means withdrawing funds from a finance facility, such as a line of credit).

You can withdraw any amount up to your approved limit, depending on what you need at the time. You’re also free to make repayments whenever you choose, giving you flexibility to manage your cash flow.

So, let’s say you have a $20,000 line of credit, and you draw down $10,000. You will only pay interest on that $10,000.

With a business line of credit, it’s a good idea to look for a truly revolving facility that will allow you to draw down and repay at any time. For instance, you might wish to draw down $5,000 on your line of credit on a Monday to cover your weekly business expenses. You can then repay this amount on the Friday when a customer pays an invoice, helping to minimise interest payments.

What to consider when applying for a business line of credit

If you’re thinking about applying for a business line of credit, you need to make sure you are able to repay the funds you draw down.

A line of credit works well for businesses in a range of different industries, from professional services and retail to hospitality and more. For instance, a restaurant might need to employ 10 additional staff to work on a large event. They can use the facility to pay the extra staff’s wages and repay this amount once the client pays their invoice.

Retail is another industry that can benefit from a business line of credit facility. Business owners can draw on the facility to pay for extra stock at busy times such as Christmas and repay the facility when stock is sold.

In fact, any business that offers customers payment terms of 30, 60 or 90 days will generally be susceptible to cash flow gaps that can be supported with a line of credit.

Ultimately, a line of credit is a business tool that provides security, peace of mind and flexibility in how a business accesses funds – it’s an easy way to stay in control of your business operations.