In many ways, one can understand why small and medium sized enterprise (SME) owners would opt for keeping spare cash in a savings account.

However, idle cash reserves are not labelled “lazy capital” for no reason. That money could be used strategically and responsibly to help grow your business.

But how do you ensure you have enough working capital on ‘standby’ just in case you need it for an emergency?

The answer is to ensure capital efficiency with a customised financial product, such as ScotPac’s business line of credit.

You can learn more about a line of credit here.

How does a Line of Credit ensure Capital Efficiency?

A business line of credit offers a smarter alternative to large reserves of idle cash. It offers immediate access to working capital finance (up to $500,000 with ScotPac) for when you need it.

A flexible line of credit allows you to retain liquidity for emergencies while keeping your cash free for reinvestment, expansion, and more profitable opportunities.

What is a business line of credit and how does it work?

A business line of credit is a revolving financial facility.

  • You can draw as much money as you need up to a pre-approved limit
  • You can repay and then redraw the money as needed
  • You only pay interest on the funds your use and not the entire approved limit
  • You don’t need any property as security
  • You can apply online and enjoy same-day approval
  • You don’t pay any fees for early repayment
How much money can you access with a line of credit?

For Australian SMEs, our line of credit offering typically offers limits from $50,000 to up to $500,000.

Funds are often available within 24 hours of approval making access to the working capital you need when you need it easier than ever.

Why is holding a large cash reserve considered “lazy capital”?

Is having a large amount of savings really “lazy capital”?

It might seem harsh; A large “just-in-case” cash reserve sounds like a responsible and safe bet. But the reality is that for SMEs it can quietly erode profitability.

Cash reserves earn little interest especially considering the costs of inflation and the opportunity costs of not using that cash to expand and future-proof your business.

It’s not about using your savings irresponsibly, it is about using each dollar in a way that offers greater return on investment for your business’s success. For example:

  • Hiring more staff
  • Upskilling your current team
  • Investing in marketing and advertising
  • Purchasing new equipment
  • Scaling inventory
  • Growing in new markets
  • Improving your technology and operations
What if you need the money for an emergency?

There are many reasons why an SME might need access to working capital quickly and unpredictably:

  • Sudden expenditure shocks
  • Replacing machinery
  • Taking advantage of time-sensitive growth opportunities
  • Seasonal fluctuations
  • Macroeconomic changes

Without a cash reserve, you can still ensure a predictable safety net for cash flow changes with a standby line of credit.

How does a line of credit improve capital efficiency?

A business line of credit increases capital efficiency.

  1. It aligns financing with actual cash flow needs
  2. It allows you to use cash more strategically without compromising financial stability
  3. You only incur interest charges when/if you use the facility

Instead of locking up capital in a static reserve, a business line of credit allows you to maintain leaner working capital balances and scale up quickly if needed.

Minimise idle cash offering no return 

You don’t need to bear the cost of idle cash because you can access funds on demand with a line of credit.

React faster to market opportunities

Having a line of credit allows you to seize short-term growth opportunities without being subject to protracted bank approval process

Maximise return on your equity

You can use your SME’s capital in greater revenue-generating activities rather than leaving it in a low-yield account.

For small businesses, a line of credit allows higher working-capital efficiency ratios and therefore stronger balance-sheet performance over time.

Ready to get started with a Business Line of Credit through ScotPac?

If you want to utilise your standby cash reserve more strategically and leverage a line of credit for greater capital efficiency, the team here at ScotPac are ready to help.

Once approved, you can avoid the stress and uncertainty of last-minute bank applications or incur opportunity costs through idle reserves all the while having access to working capital if cash flow pressure hits.

Contact us today to speak to a lending specialist about how business line of credit can help you. With over 35 years of experience and 9,300 businesses currently being supported by our team, we have the experience and expertise to help fuel your business’s success.

FAQs for Business Lines of Credit

What documentation do you need for a line of credit?

To apply for a business line of credit all you need is 6 months of business bank statements, privacy consents, and photo ID for directors or borrowers. 

What is the difference between a line of credit and a business loan?

A business loan provides a fixed sum of capital in one go. You then need to repay the principal plus interest over a set term.  

A line of credit is a revolving facility where you only pay interest on the amount you use and can redraw the funds as you repay them. 

How does a line of credit compare to Invoice Finance?

Invoice Finance requires outstanding invoices, i.e., money owed to you by your customers, to be ‘sold’ to your finance provider in exchange for a cash advance. 

While Invoice Finance is a particularly useful business solution, it is tied to debtor invoices and therefore may not be suitable for all SMEs, e.g., non-business-to-business operators. 

Is a Line of Credit better than a bank overdraft?

Bank overdrafts are a more traditional form of business finance and are often slower to access thanks to the tighter security and stricter eligibility criteria. 

In some instances, you may be charged interest on the entire overdraft usage as well costing you more. The limited flexibility of a bank overdraft and the requirement in many cases to secure the facility against an asset, such as a property, can make an overdraft facility less fit-for-purpose for many SMEs. 

How can you make best use of a Line of Credit as a cash reserve?

If structured and managed correctly, a line of credit can be just as safe as a savings account cash reserve. Here are some tips and ways for ensuring your facility is safe and used effectively: 

  • Use the line of credit only for actual working capital needs e.g., stock orders and payroll 
  • Continuously monitor your opening balance and repayment schedule 
  • Stay on top of your accounting to ensure your company is healthy financially 
  • Speak to a ScotPac lending specialist for custom support and advice