How to use business credit wisely for cash flow and growth

If someone describes themselves as ‘being in debt’, it’s often considered a negative – they might have overspent on their credit card, for example, or otherwise be struggling financially. But for some small business owners, the debt that comes from taking out a small business loan or a line of credit facility can, in the right circumstances, be a step to growth.

We spoke with two experts for their advice on how to make the most of access to credit, which debt type is suited to which circumstances and more.

What are the different types of small business debt?

Small businesses can obtain credit via a small business loan or a line of credit.

According to Sam Roby, co-founder of Pure Capital, a Sydney-based broker specialising in car and equipment loans, a small business loan suits large, one-off expenses.

“If you want to run a marketing campaign, for example, but need $10,000 or $15,000 to get it off the ground, that’s when you’d consider a small business loan,” he says.

The debt on a business loan is paid across a fixed repayment term, with the possibility of early repayments reducing the total cost of the loan.

By contrast, a line of credit is an ongoing credit facility that provides cash flow when it’s needed across a set term, and you pay interest only on the funds you use.

Speak with one of our small business lending specialists about how a Prospa Line of Credit could help you.

Sam says this avenue works for small businesses that rely on stock turnover.

“With a line of credit, you can borrow the money when you need it, you only pay the interest when you’ve actually got the loan outstanding, and when the money comes in through sales of that stock, you can pay it off and leave it running in the background.”

Some small business owners will also use their personal credit card to boost cash flow or make a business-related purchase. Sam says that personal credit cards should be used only for small, everyday expenses, such as buying coffee or office supplies – for the convenience of the payment method, rather than for the cash flow. Larger expenses are the domain of a loan or line of credit.

So how do you decide on the method of credit that’s right for you?

“If you need to spend money straight away and you know what you’re spending it on, then a business loan is best,” says Sam. “But because you’re paying for it from day one, you have to make sure you’ve got a use for it. You don’t want it sitting in the background costing you money.”

A line of credit fits the bill for business owners with smaller ongoing needs or to purchase immediate stock and supplies.

“If you’re looking to get a credit facility set up for potential future expenses, or you’re not 100 per cent sure where the money’s going to go but you would like a safety net in the background – that’s when we’d recommend a line of credit. It doesn’t cost you anything until you use it, but you can continue to draw down when you want.”

See how Victorian chef Brad used a Line of Credit to help build his vegan food business:

How access to credit can support business growth

Used wisely, access to credit through a business loan or a line of credit can help boost cash flow and profit.

Sam recommends weighing up what the debt will cost in monetary terms versus the outcomes for the business from using that money. And a loan with fixed costs is a simple way to get clarity on that.

“Say you’re in the fashion industry, and you need money to get stock through the door,” he says. “You may gain more buying power and drive your costs down by borrowing money.

“Getting the loan in the first place might impact your immediate cash flow (if using a small business loan), but there may be tax implications and advantages to using borrowed funds which may decrease the real costs. At the end of the day, you’re using someone else’s money to maximise your ability to make your own.”

Bernadette Christie-David, finance broker and director of Atelier Wealth, agrees that access to credit can have a hugely positive impact on your business, if done for the right reasons.

“If you don’t have the income or savings to pay for something, having access to credit gives your business an advantage,” she says, referring to the ability of well-funded businesses to purchase essential stock or equipment, or expand sales operations.

But Bernadette believes there are two essential questions business owners should ask themselves before committing to taking out a loan or a line of credit.

• Is it going to boost revenue?
• Is it going to boost productivity?

“If, for example, you’re getting finance to fit out your office and find that it’s going to boost productivity, then that would be a worthy investment,” she says.

But she warns owners against using business financing to plug gaps in shortfall without looking at the broader picture and ensuring they can make repayments on time.

“I think where people can get stuck is if they aren’t proactively managing their cash flow,” she says.

And if businesses are looking for guidance at any stage in the process, there’s no better source of advice or insight than someone in the know – someone who’s been there.

“Talk to your broker or whoever organises your finances and keep an open and honest line of communication,” says Sam. “We can’t help you if we don’t know what’s going on.”

“We’ve seen every situation before, and we’ve got clients across the whole spectrum. We’re often business owners ourselves. We can help if we know.”