A business line of credit provides small and medium sized enterprises (SMEs) with a number of benefits. Apart from access to flexible working capital to fund growth, meet operational expenses and ensure efficient cash flow management, it also operates as something else: A Personal Liability Firewall.
To explore ScotPac’s line of credit solution click here.
What is a personal liability firewall?
A firewall is simply a term that refers to a system of security. Often used in reference to IT or cybersecurity, a personal liability firewall protects one from direct financial exposure.
When it comes to your business, personal liability is a risk faced by a number of parties, including:
- Owners
- Partners
- Directors
This means they can be held personally responsible for business debts and obligations. In some cases, this may put their assets, such as homes or investments, at risk.
It’s the opposite of limited liability, where only the company’s assets are on the hook.
How does a business line of credit protect your assets?
A business line of credit can act like a personal liability firewall for company directors.
It gives the business access to flexible working capital. Why is this important?
- It prevents you from needing to access personal savings.
- It prevents you from drawing on your mortgage.
- It prevents you from using personal credit cards.
Using a business line of credit ensures you are not at risk by having to cover short term cash flow gaps in your company with personal funding solutions.
A dedicated business line of credit helps keep funding and risk where they belong, inside the company’s financial structure.
Why would your assets be at risk?
How does the Australian Taxation Office put directors’ assets at risk?
The ATO’s director penalty regime can make directors personally liable for certain unpaid company tax and debts. This means that your personal assets can be exposed if the business cannot pay what it needs to.
When cash flow is tight, many business owners respond by covering the gap with their personal funds. Or they might use their existing (or new) property-secured loans. This, often unintentionally, blurs the line between business and personal risk.
Common reasons for personal liability exposures include:
- Unpaid PAYG withholding
- Unpaid superannuation guarantee charge
- Unpaid GST
- Director penalty notices (DPNs)
Relying on personal cash and property to keep up with business payments can quickly compromise your own financial position, undermine your business’s sustainability and reduce long-term security.
How can a business line of credit create a ‘personal liability firewall’?
A business line of credit gives your business access to a reliable and revolving pool of funds.
These funds can be drawn on when working capital is tight. It can cover:
- Tax
- Super
- Wages
- Invoices
- Overhead costs
Thereby, preventing you from having to use your personal funds.
A line of credit is secured against your business performance and assets rather than your personal home, allowing you to keep a clearer boundary in place between corporate risk and personal wealth.
- Ensure sufficient company-level funding for tax payments
- Avoid the temptation to inject personal cash during tough moments
- Less reliance on personal credit cards, offsets or redraws secured by your house
- Reduced risk of ATO recovery actions bening triggered
Why use a ScotPac business line of credit?
ScotPac’s line of credit solution, along with all our finance products, is designed for SMEs that want flexible, on-demand working capital
Instead of bank-style property lending, ScotPac assesses the potential and performance of the business and secures facilities against business assets and cash flow.
What are the key advantages of a business line of credit?
- There is no need for property security
- You only pay interest on the funds you draw
- You can redraw funds once repaid
- Credit limits vary depending on your business’s needs
- Fast approval processes and funding ensure quick access to working capital
When is a business line of credit better than using personal savings?
A line of credit is not just a better tool for business funding than personal savings because of the personal liability aspect. It solves the common issue of cash flow timing, rather than fixing structural unprofitability. Covering short-term cash gaps between raising invoices and receiving customer payments.
- Cover seasonal increases in business expenditure
- Fund rapid expansion and growth
- Take advantage of market opportunities
- Avoid the “slippery slope” of repeated personal cash injections
How do you use a line of credit as an effective firewall for personal liability?
To ensure your business line of credit is an effective personal liability firewall, it needs to be more than just another source of debt.
It needs to be one part of your comprehensive risk management strategy.
What does this mean? Your line of credit should tie into your broader cash flow planning and governance processes.
Here are some tips to help you do exactly that.
- Set clear rules and boundaries to ensure business expenditure is covered by the line of credit and not personal funds
- Monitor your cash flow to ensure that you access funds early enough and not when it is too late
- Save your personal assets as an absolute, end-of-the-road, last resort emergency fund and not for daily operational needs
- Review your line of credit limit regularly to ensure it is fit for purpose
- Seek advice from a lending specialist here at ScotPac, as well as your accountant and financial advisor
Used this way, your line of credit is not just a strong cash flow management tool but a structured safety net that will protect both your business’s sustainability and your personal liability/financial position
Contact ScotPac today to find out more
Want to find out more about how a business line of credit can help your business?
Are you interested in using a line of credit to protect your assets and serve as a personal liability firewall?
Here at ScotPac, we currently support over 9300 businesses and have been providing SMEs with tailored financial solutions for over 35 years of experience. Contact a lending specialist today and let us help you ensure your business’s success.
