If you are a small or medium sized enterprise (SME) in Australia looking for the right financial solution for your business, you may already know about the benefits of a business line of credit.
But even with an approved LOC facility, many business owners may be unsure what draw strategy to use. In other words, when and how to use their line of credit most successfully.
This is the Access Paradox. And without the right guidance, you can find that just having an LOC doesn’t provide you with the growth potential, cash flow flexibility or strategic decision-making ability you were after.
For a custom business line of credit solution, make sure to speak to the ScotPac team today.
How can you ensure cash flow optimisation?
What do we mean when we talk about optimising a business line of credit?
In simple terms, we just mean making sure you draw on funds strategically. If you use your LOC facility to strengthen cash flow, enhance profitability and ensure long term success, that is optimisation.
On the other hand, if your business line of credit is merely drawn on randomly whenever you find yourself short of working capital but without an overall plan, you might find down the line that it does not offer the financial buffer you intended.
What are the benefits of cash flow optimisation?
With a well-managed LOC, you can:
- Maintain smooth cash flow during seasonal slowdowns
- Cover gaps in cash flow
- Maintain operational efficiency
- Cover large supplier orders
- Take advantage of bulk or early payment discounts
- Fund growth opportunities in the market
- Upgrade equipment
- Expand your business
When should you draw from your line of credit?
A draw strategy is designed to help you know when to draw from your line of credit, rather than leaving it to the whim of your current predicament or challenge.
As a general rule, it is recommended that you draw funds before your cash flow tightens. The reason being is that you can then strategically employ the additional working capital to save more, generate greater productivity or ensure ongoing revenue, and offset the cost of credit.
1. Draw funds early
Waiting too long can disrupt your business’s operations. So, anticipate short-term shortages and draw on funds earlier.
2. Repay funds early
Drawing on funds earlier should be coupled with repaying the funds earlier. This minimises the cost of credit (i.e., interest) and signals your strong credit and cash management to creditors.
3. Avoid habitual drawing
A draw strategy should help you avoid just drawing unnecessarily and reflexively to fund routine expenses. It is important that each time you draw it is aligned with your strategy and goals.
4. Track utilisation
In general, it is recommended that you maintain a usage ratio of your LOC facility of under 60%. This balances the use of the additional funds without putting your SME under undue stress.
5. Think in cycles
Cash flow optimisation can be easier when you think in simple cycles:
- Draw funds
- Use the funds
- Repay the funds
- Repeat the process
Getting into this habit will ensure long term effective use of the line of credit.
6. Use your tools
Using accounting platforms and your forecasting tools will help you better employ and time your use of a line of credit facility.
7. Review quarterly
Even business owners with the right habits and draw strategies may need to make adjustments. So, review your cash flow management at least once a quarter and align your credit limits with your growth objectives and seasonal revenue fluctuations.
What should you avoid doing for effective cash flow management?
It is recommended that you avoid using your business line of credit for:
- Covering ongoing losses
- Recurring fixed costs
Why? Because this can lead to dependency on the additional working capital and limit its availability for deployment for business growth opportunities.
- Avoid using the LOC to cover payroll gaps too often
- Avoid delaying permanent funding solutions for long-term expansion
- Avoid ignoring the accrual of interest by drawing funds without a strategy
How does a draw strategy ensure cash flow optimisation?
With a strong draw strategy, your line of credit can effectively act as a working capital buffer. It ensures you can weather temporary cash flow volatility and plan for longer term growth.
- Fill in the cash flow gap caused by the timing between invoicing and payments received
- Avoid the stress of seasonal fluctuations in demand
- Ensure your suppliers are paid on time
- Take advantage of time-sensitive market opportunities to expand
- Avoid high-interest short-term loans
- Stay on top of your repayments by limiting when and how much you draw
- Avoid the access paradox
How do you get started with a business line of credit?
If you are ready to explore how a business line of credit can help you achieve cash flow optimisation, reach out to the ScotPac team today.
Our lending specialists have been providing fast, flexible and tailored working capital solutions to Australian SMEs for over 35 years, and we would love to partner with your business too.
Contact us today for more information about a business line of credit.