How to Choose the Right Line of Credit Loan for Your Business
Money is needed to help a business grow — whether for buying new equipment, paying invoices, or as working capital for seasonal fluctuations.
Fortunately, a business line of credit loan can be a great solution that allows ongoing access to money, so you don’t need to worry about getting approved every time.
Today, we’ll talk about how to get the right small business line of credit and why you may want to consider it.
What Is a Business Line of Credit?
A business line of credit loan gives you flexible access to a certain amount of money whenever you need it.
The total size of the credit line is agreed upon from the start, so small business owners won’t need to worry about credit approval every time they need money.
You won’t need to withdraw the whole amount. Instead, you can take out only as much as you need, and you’ll only need to pay interest for the amount you withdrew.
A business line of credit loan can be a revolving line of credit — so you can borrow, repay, and borrow again without needing to reapply each time.
Repayments after you withdraw funds are normally automatically debited from your bank account weekly.
This works similarly to a business overdraft. However, you get a business overdraft through a transaction account, while a line of credit is standalone business finance.
A business credit card in the form of an overdraft can potentially put you in more debt.
How Does a Line of Credit Work?
Imagine your set limit is $50,000, and you’re aiming for a new marketing campaign and website. You won’t need to withdraw your entire credit limit.
You can first withdraw $5,000 to redo parts of the website, so you have $45,000 left in your credit. The lender will only charge you interest for $5,000.
Then, when you return the money, your credit reverts back to $50,000, and you have that amount available to you when you need money again.
The term for a business line of credit is typically 3-60 months, but you may have a revolving line of credit without a maximum term. If you have the latter, you’ll typically need to complete a new assessment every 1 or 2 years.
Requirements for a Line of Credit Loan
Many lenders like Lumi will typically have similar requirements for business line of credit loan applications. These can include:
- Proof of ABN and GST registration
- Business bank statements
- Tax returns
- Other financial records (like profit and loss statements and balance sheets)
- Business plan explaining where you’ll use the funds
- Proof of being an Australian citizen or permanent resident
You can apply online with just a few clicks and will usually receive an answer within the next few hours. You might even be able to get the money on the same business day.
However, double-check the requirements and processes with the online lender you’re applying to.
Benefits of a Business Line of Credit
Access to financial resources is important for small businesses — and there are many benefits to choosing a business line of credit. Some of these include:
- More flexibility
- Possibly more cost-effective than traditional loans
- Convenient and easy access
- Can improve cash flow management
- May help build your credit history (provided you make your repayments on time)
- Typically doesn’t need collateral
- Gives you control over what you borrow
- Easy to manage thanks to predictable payments
- Continued access to funds
- Can give you a competitive advantage
Considerations of a Business Line of Credit
A business line of credit loan can help you cover unexpected expenses or provide you with working capital to grow your business.
However, there are also some considerations before applying to online lenders.
For one, some lenders might charge ongoing fees even if you’re not using your credit. This is called a line fee, and it’s the ongoing fee you give your lender to keep your line of credit open.
Lumi, on the other hand, only charges a one-off establishment fee based on your limit. No need to worry about any other ongoing costs.
Finally, some non-bank lenders might also charge higher interest rates than a standard term loan. Always best to compare your options before making a decision on which lender to go with.
FAQs
Is a business line of credit the best option for you compared to other business loans? Read this section to decide.
How Is a Business Line of Credit Different From a Loan?
The main difference between a business line of credit loan and a traditional loan is how you withdraw and repay funds.
A business loan gives you a lump sum of cash upfront. Then, you’ll need to follow a monthly repayment schedule. If you don’t pay the minimum amount every month, the unpaid amount will accrue additional fees.
Once you’re fully paid, your lender will assess your credit, which will affect if you can borrow more from them in the future.
Meanwhile, a business line of credit loan has a pre-agreed credit facility you can draw from whenever you need it.
You don’t need to use the whole lump sum in one go. Instead, you can withdraw only part of it, and you’ll need to pay interest only for that money you withdrew.
Then, you can pay that back so you have more credit to pull from again when you need it.
Is a Business Line of Credit Secured or Unsecured?
A business line of credit loan can be secured and unsecured.
A secured line of credit typically has lower interest rates. However, you’ll need to use residential or commercial property or other business assets as collateral.
You won’t be able to sell that asset as long as the line of credit is open.
Meanwhile, an unsecured line of credit normally has a higher interest rate since, similar to an unsecured business loan, you don’t need asset security.
However, you get a more straightforward and faster access to funds.
Conclusion
Some of the best business line of credit providers, like Lumi, have an Australian Credit Licence.
A business line of credit might be better for some businesses than other lending solutions because of their flexibility.
You can choose a secured line and provide an asset like property in exchange for money and a lower interest rate.
Or, you can get an unsecured line that doesn’t require you to surrender assets like residential property or a car. But, this tends to have a higher interest rate.
Regardless of your choice, Lumi can give businesses fast access to funds. Get in touch with our friendly team to walk you through our business finance options and see which one would be best for your business’s individual circumstances.
