Is a Business Line of Credit the Right Choice for Small Businesses? Our top tips!

For small and medium sized enterprises in Australia, effective cash flow management is an ongoing challenge. When seasonal fluctuations in revenue or unexpected operating expenses put pressure on your cash flow, finding the financial tool that offers flexibility and convenience in accessing much-needed working capital is critical.

A business line of credit can be an excellent choice for a number of SMEs. But how does it work, how does it differ from a business loan, and is it the right fit for your business?

What Is a Business Line of Credit and Why is it a Top Choice?

A business line of credit is a flexible business finance option that allows you to borrow a predetermined amount of money. This is referred to as your credit limit.

The line of credit works in a similar way to a credit card in that you can draw the funds you need when you need them, repay those funds, and then re-draw the money again should you need it in the future. The interest you owe with your repayments is only charged on the amount borrowed, not the total credit line available.

How Does a Line of Credit Differ from a Business Loan?

There are a few key differences that make a business line of credit a top choice for many businesses over a more traditional loan.

With a business loan you receive a lump sum of working capital upfront. This loan is then repaid in fixed installments over a set term with interest charged on the entire amount you still owe. In contrast, a business line of credit allows you to only pay interest on what you draw, offers more flexible repayment terms, and allows you to re-draw as you need.

Business loans can be effective for funding specific growth activities such as equipment purchase or investments. A line of credit is a top choice for funding shorter term expenditure or for businesses without the collateral or stricter eligibility required for a loan.

How can you tell if a Business Line of Credit is right for you?

At ScotPac, we have been helping SMEs in Australia access the right business finance solution for their needs for over 35 years. So, if you would like custom advice, make sure to speak to our lending specialists today.

However, to help you get started, ask yourselves the following questions to work out whether a business line of credit is likely to be your top choice of working capital solution.

1. What do you need the working capital for? A line of credit is ideal for ongoing cash flow management, whereas a loan may be better for a specific, larger investment.

2. How much cash do you need? A credit limit may or may not cover the amount of cash you need for a specific business expenditure or investment.

3. Can you afford the interest and fees? Lines of credit offer more flexible repayment terms and only charge interest on the money drawn, however the total cost of borrowing may be higher when aggregated over the long term. Always check the total costs as well as the terms and repayment flexibility offered.

How can you use a Line of Credit most effectively?

A business line of credit can be ideal for businesses needing ongoing access to funds to better manage their cash flow, cover gaps related to unexpected expenses, or ensure the access to working capital needed for short-term operational needs.

To most effectively utilise your line of credit for long term success, here are our top 10 tips.

1. Keep it short term 

Lines of credit are designed for short-term funding. They work best in helping to handle cash flow gaps, seasonal fluctuations, or emergency expenditure rather than long-term investments.

2. Only use what you need 

To keep your interest charges low, only draw on your line of credit when you need it and only take what you need.

3. Prioritise early repayments 

The earlier you repay the better as this lowers interest costs and replenishes the amount of funding available again for future needs.

4. Keep track of the costs

Business lines of credit may come with fees associated with the facility. To avoid surprises, make sure you discuss potential costs with your lender and understand what is involved.

5. Stay on top of your repayments 

To increase your credit limit over time and build up a good credit score, make sure you maintain a good repayment history.

6. Avoid bad habits in use 

We recommend resisting the urge to use a line of credit for everyday expenses. Rather, use a line of credit strategically to ensure sustainable cash flow management. A good borrowing plan or budget can help you stay disciplined and prevent overspending.

7. Review your facility 

Your line of credit may have fixed terms, so take the opportunity to reevaluate your terms and shop around for the best fit in terms of fees and interest rates.

8. Create a broader financial strategy 

A business line of credit is not a financial strategy. While it can be a critically important tool in your broader plan, make sure you combine it with other financing strategies and tools for long term growth and success.

Would you like to know if a Business Line of Credit is the Right Choice for your Small Business?

There are many advantages to a business line of credit. Its flexibility in fund use, interest efficiency, quickly accessible nature, and general usefulness in ensuring working capital for effective cash flow management, can help SMEs thrive.

ScotPac currently supports over 9,300 businesses, and through our experience and expertise we know that every business is unique and requires a unique solution. So, whether you would like to find out more about whether or not a business line of credit works for your needs or would like to explore the right financial facility to fuel your growth, we are here to help. Contact us today for an obligation-free initial consultation.