The benefits of a business line of credit
Cash is king in business, and a business line of credit is a great way to ensure you can access funds when you need them.
A line of credit offers a convenient and flexible source of funds that lets you run your business on your terms, 365 days a year. For small business owners, it’s a great way to manage seasonal fluctuations, cover dips in cash flow or settle unpaid invoices.
What’s involved in a business line of credit?
When you take out a business line of credit, the first step is to determine the amount you want available to you. Once the facility is approved, you can draw down all or part of the available funds.
Let’s say your retail business imports ceramics from overseas and wholesales them to local gift shops. In this example:
- You have obtained a $25,000 line of credit to help manage unexpected cash flow gaps when running your small business.
- When you receive a large order from a retailer, you can draw down $10,000 from the line of credit to purchase the goods you need to fill the order.
- Then, when the retailer settles its invoice, you can use these funds to pay back the $10,000.
- You only pay interest on the $10k for the time you used it.
As this example shows, a line of credit offers businesses two major benefits:
You can choose how much you borrow with a business line of credit up to a pre-determined limit (for example, $25,000). Once the facility is open, you can decide for yourself how you use the funds – for wages, stock, equipment or whatever business expense you choose.
When you draw down on your business line of credit, a minimum schedule is established and usually includes principal, interest and any applicable fees. You can also choose to make additional payments towards your principal loan amount.
2. Cash flow management
With a business loan, borrowers pay interest on the full value of the principal over its entire life. A business line of credit, on the other hand, sees you pay interest on just the amount you draw down before you pay it back. This has the capacity to reduce the cost of borrowing and help regulate your cash flow – if managed properly.
The business benefits of a line of credit are clear, but you need to ensure you pay back part or all of the facility when you have the funds available, as this will help reduce your interest.
A line of credit is a great option if you’re looking for a hassle-free way to manage your business’s cash flow.
Find out more about Prospa’s new Line of Credit, or speak to one of our business lending specialists on 1300 220 215.
The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.