What is a Business Line of Credit?

Most often than not, business owners usually find that even though business is doing good, there will always be instances when there are additional expenses faced by the business and it just is not financially possible for the business to spend on it no matter how much it tries to get additional funds from the cash coming into the business.

At times like this, what can most businesses do? The answer? Apply for a business line of credit loan.

A business line of credit is defined as exactly as it is named; credit lines for business will be available where funds can be drawn whenever a business needs it or sees fit to use it for any other expense that it may encounter or decide upon.

This is a type of business finance where there is a fixed amount given to a business where they can draw their funds from for its additional expenses. The fixed amount serves as the business’ credit limit, much like how a business credit card has a credit limit depending on the persons’ credit score.

This is useful as a business need not ask for loan approvals from its bank nor need to apply for another business finance plan when an additional expense pops up.

In this type of business finance, the business only needs to pay for what it actually spent on the expenses.

This way, businesses are ensured that they will be able to manage cash flow services whenever they have shortages, or ensure that they have additional funds for additional expenses that can help decrease the possibility of actually having a cash flow shortage.

Types of Business Line of Credit

There are 2 types of business line of credit: an unsecured or secured credit line for business.

What do these types entail? An unsecured line of credit simply means that a business need not to tie up any collateral or any asset to the said credit line, while a secured line of credit is the opposite where there is a collateral or an asset needed in order to secure the line of credit.

Businesses however, must take note that whatever type of line of credit loan they choose, they should be aware that it should not be used to make major purchases for the business or use it for any long-term investments.

Other than these two types, some financial institutions also offer a revolving line of credit where the amount of credit a business pays for, will become available for the business to use again.

Why get a Business Line of Credit?

Entrepreneurs and business owners often face unforeseen expenses, temporary cash flow issues, or opportunities that require quick access to funds. This is where a business line of credit comes into play as a powerful financial tool.

By providing companies with a readily available source of capital, a line of credit offers the versatility and convenience needed to navigate these challenges and seize opportunities for growth.

There are several reasons why businesses should look into getting this type of business loan, we’ve rounded up most of the popular reasons why:

• A business going through the quiet months, because let’s face it, there is always downtime when it comes to businesses, during this season, it’s better to be safe than sorry.

• A business preparing for a really busy season coming from the quiet months should also look into getting a business line of credit. Coming from the quiet months, one’s cash flow can be greatly affected, and if you’re missing out on stocks once a busy season comes, there can only be one result: a loss.

• To better the cash flow, especially if you’re a small dollar, high volume business.

• Your credit score is really low or not high enough to be granted any traditional business loan.

• For a business who has suppliers who do not accept credit card payments or worse, adds additional fees when using business credit cards as payment, a line of credit is one of the best options.

• A business who needs to build their business credit for the first time.

What are the requirements we need to prepare?

Traditionally banks offer line of credit facility for business to those with good or clean track records.

However, today, other financial institutions who are not banks are gaining popularity and very much offer this type of finance for businesses today.

Here are some of the requirements to ready, be it with banks or other financial institutions:

• The business’ life – how long the business has been running is an important factor when it comes to a business line of credit. Banks would want for a business; years to be longer than those required by other financial institutions (non-banks)

• The business’ flow – several factors are included in this one, and the biggest question you would need to answer is this: will your business survive the upcoming years to come, and how long is the expected lifespan of the business? With this requirement, banks and financial institutions will check up on the business’ liabilities and even the cash flow to determine the answer. Banks here tend to be a lot more demanding.

• Your Collateral – While an unsecured line of credit for business sounds like one of the best options out there, you will need to remember that any unsecured loan has a limit, and it usually is pretty low. What if a business is in need of a much higher line of credit amount, then a business will need collateral to use as a form of security? Remember that banks are stricter than other financial institutions that offer this type of loan for businesses.

• Your personal credit score – Like we said, banks need clean or good track records from those who are trying to apply, and while other financial institutions are more lenient, it does not mean that your credit score won’t get a good look at by them. Your credit score is important as well.

• Bank Statements – Bank statements are inevitable as they will show how the business handles its financial aspects. Be it from banks or other financial institutions, bank statements are a crucial part when applying for this type of business loan.

• The Whys – Banks and even other financial institutions will also ask your purpose of applying for one. And while some may think that this is only a form of formality, this is something important. Banks and other financial institutions take note of various reasons as to why businesses are applying for certain business loans in order to be able to make better offers, especially to those businesses who have recurring reasons to apply for a line of credit with other businesses.

The Pros and Cons of a Business Line Of Credit

In Australia, there are several types of small business loans that are available for businesses, a business line of credit is the most common and the most popular.

A business line of credit offers a versatile and flexible financing solution that can be invaluable for companies navigating the dynamic world of business. With its unique features, a line of credit can be a game-changer for many organizations.

However, it’s crucial to weigh the pros and cons before deciding if a business line of credit is the right option for your company. By carefully evaluating the benefits and potential pitfalls of a line of credit, companies can make informed decisions that best support their financial needs and long-term success.