What is a business line of credit?
A business line of credit, also known as an LOC is a type of business finance that allows you to draw against an agreed amount of funds when you need to. The agreed amount is your approved credit limit. Once your business has a line of credit facility in place you can access these funds when you choose, without having to get approval from your lender or without having to apply again.
The different options available
A business line of credit is available secured or unsecured from both banks and non bank lenders. Unlike a secured line of credit, an unsecured line of credit means you do not have to tie up any collateral or assets as security against the funds borrowed. Some lenders may also offer a revolving line of credit to established businesses, meaning as you pay back your credit limit, the amount you repaid will be made available to you again.
How does a line of credit compare to other business loans?
The main difference is that you start paying interest on a lump sum immediately when you take out a business loan whereas with a LOC you only pay interest on the amount of money you draw down. How does it differ from an overdraft? You can access funds from a line of credit whenever you need them, unlike an overdraft which can only be accessed once your account goes into the red.
|Loan Type||Requirements||Time to Funding & Amount||Avg. Interest Rate & Costs||Repayment Terms||How It Works|
|Secured Business Term Loan||Credit and ID Check. Bank statements. 12+ months in business. Business financials. Collateral in case you default, such as your home, car or other assets. More paperwork.||Slow (weeks or months)
$50k - $10m
|2.97% - 9.83%||1-10 Years||A term loan is a loan that is repaid in regular payments over an agreed period of time. Usually for a specific purpose. You need to secure the loan with collateral such as property.|
|Unsecured Business Term Loan||Credit and ID check. Bank statements. 3+ months in business. Less paperwork. 100% online.||As fast as same-day
$5k - $250k
|2.97 - 12.83%||3-12 Months||Same as above, but no collateral required.|
|Business Line Of Credit (LOC)||Credit and ID Check. Bank statements showing a good track record and that you can afford to borrow. Good credit score. Time in business of 6+ months. No collateral required.||
Fast (1-2 days)
$5k - $250k
5.07% - 12.45%
Application fee: 0.5% - 3% of credit limit.
Monthly service fee: varies
|3-30 MonthsRevolving LOC has no term, once you repay you can draw down again.||Agreed credit limit is made available to drawn down upon. Only pay interest on the amount you draw down.|
|Merchant Cash Advance||Credit and ID Check. Minimal paperwork. Very lenient. You don't need a perfect credit score. 6+ months in business, bank statements showing regular deposits. No collateral required.||Fast (1-2 days)
$5k - $250k
An agreed % of your merchant sales is repaid daily (weekdays only).
|Lump sum Advance in return for a % of daily credit card and EFTPOS sales.|
How much can you borrow?
The lender will approve your credit limit based on your business finances including your gross revenue and cash flow. Credit limits and how they are calculated vary from lender to lender. For example, one lender may cap your credit limit at a percentage of your gross revenue, whereas another lender may cap it based on your cash flow.
Different lenders have different minimum and maximum loan terms. Here’s an example of what to expect: Line of credit – Loan term between 3 to 30 months. Revolving line of credit – No term, once you have paid back the amount, you can draw down again, this is why it’s called a revolving line of credit. Although the line of credit will be reviewed now and then (e.g. every 3 years). It’s a lot harder to get a revolving line of credit from a bank. See the requirements section below for more information.
Interest and fees
Some lenders charge a one-off application fee. This is usually based on the approved credit limit. For example, you may need to pay 0.50% to 3% of your approved credit limit. So for a $50,000 limit the application fee would be anywhere from $250 to $1500. And there may be a minimum fee.
As with any finance product, line of credit interest rates vary from lender to lender. Depending on your business situation, the lender will approve your credit limit and interest rate which applies each time you draw funds. Generally speaking, you will only pay interest on the portion of funds you draw. For example, if you had a $25,000 line of credit and you withdrew $10,000, you would only be responsible for paying interest on the $10,000, not the entire $25,000. This gives you greater flexibility and should cost you less than short term business loans. Bear in mind that you will need to keep meeting your interest payments on any amount you draw until it’s paid back, so it can get costly if you only pay the interest and not the principle. On the flip side, you wouldn’t need to pay any interest during times when you do not access any of the funds.
Monthly service fees
Some line of credit facilities come with a monthly service fee for the privilege of having access to the funds. The monthly fee is payable whether or not you are using any of the funds. The fee varies between lenders and it’s important to understand all fees before you agree to a line of credit. It’s always best to check the comparison rate (interest rate and fees combined) when comparing lenders. Use our business line of credit calculator.
Line of credit requirements
In general, traditional lenders like banks will only offer a line of credit to established businesses with a good track record. LOCs issued from non bank lenders are becoming more popular, readily available and a faster option.
Time in business
How long you’ve been in business is a big factor. Banks usually require a longer time than non bank lenders.
Can your business afford to borrow and keep meeting the monthly payments? Several factors will be taken into consideration, such as your business cash flow and liabilities. Again, the banks are likely to be more demanding than FinTech lenders.
When getting a line of credit from a bank, you will need to offer an asset as collateral, such as residential or commercial property or equipment. However, many non bank lenders are much more flexible and can issue you an unsecured line of credit usually up to value of $50,000. Beyond this amount they too will generally require some form of collateral.
Your personal credit score will be checked.
You will need to provide at least 6 months of your most recent bank statements
How will you use the funds?
Typically with bank business lending you will need to go through an arduous application process and only then, the strongest of businesses will be offered funding. The following table shows a list of documents required by banks compared to non-bank lenders, when applying for a line of credit.
|Bank Lender||Non-Bank Lender|
This is why small business is turning to non bank lending more frequently. Non bank lenders will generally assess your business and fund you in a matter of days by reviewing your bank statements as well as verifying who you are against online bureaus. This fast application and convenience will often come at a higher price which is something you need to weigh up.
Read our guide: How To Get A Business Loan.
The Pros and Cons of a line of credit
|Easy application process (non bank lenders)||Interest can add up if you don't pay down the balance|
|Fast access to money - funds available within 24 hours||Higher interest than a traditional term loan|
|Only pay interest on the actual funds you draw down, instead of full loan||Not recommend for capital purchases|
|Greater control - draw funds as and when you need them|
|Great for unexpected expenses|
You may wish to consider a company like Waddle who is the fastest growing cloud-based invoice financing provider. Businesses across Australia are using Waddle to manage cash flow, access cost effective working capital and drive their business forward. Waddle provides a seamless integration with leading cloud accounting software platforms like Xero, Myob and Quickbooks making the process to access funding extremely easy.
There are many different types of loans for small business in Australia, but the line of credit is one of the most popular. According to FitSmallBusiness.com, 47% of small businesses currently have a credit line.