In most layman terms, a business line of credit is similar to a credit card. With a line of credit, a lender provides an ongoing commitment to a business by setting up a credit limit to use it based on their requirements. The lender only charges interest on the funds utilised by the business.
Business owners can greatly benefit from having a line of credit by allowing more flexibility to a business in terms of managing cash flows. It is considered an essential product for any business especially in emergency situations. Business line of credit is also referred to as “Revolving Line of Credit ” or simply “Line of Credit” or a “Business Overdraft”.
Business line of credits are good for businesses which have short term cash flow fluctuations and can be very economical if utilised efficiently.
Check if you are eligible?
Borrowing Limits | |
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Loan Amount | 10k- $750k |
Term | Up to 5 years |
Can be used for |
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Repayments | Weekly/Monthly amortised over a period of time |
Security | May be required after a certain amount |
Pre-Approval Time | 24 hours – 48 hours |
Unconditional Approval and Settlement Time | 1-3 days |
Low Doc Approval and Documents required |
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Full Doc Approval |
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Interest Rates | Starts from 7.99% p.a. |
Benefits |
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*The information provided in critical information sheet is intended as a guide only. Please contact us for more information
Generally, there are 2 types of a line of credit.
A revolving line of credit means the line of credit is an open-ended credit account. This allows borrowers to draw the money and repay it as many times during the tenure of the facility. In most cases, a line of credit is offered as a revolving line of credit.
A Non-Revolving line of credit functions the same as a revolving line of credit. However, an exception is that, there is no option to redraw even after repayments are made. Once borrowers fully utilise the line of credit, the account will be closed.
As a line a credit is a predetermined credit limit that you can draw at any time within the set limit. As money is repaid, you can re-draw the funds again. You don’t have to always use the entire limits. Rather, you can assess how much money you want to spend using the line of credit as per your business needs and only pay interest on the amount you draw, not on the whole credit line. Some lenders offer the option to amortize the repayments of the limit utilised up to 4 years to suit your business cash flows. You have the option to repay the entire outstanding balance at once as well.
Line of credit illustrated by an example
Assume you are a small business and need funds on an ongoing basis to pay wages, rent, bills, cover unpaid invoices, buying stocks, paying suppliers etc. Based on your business and cash flow assessment a lender approves a business line of credit of $100,000.
Now you have flexibility to use the available funds up to $100,000 any point and any number of times.
Say in month 1, you just drew $25000, and paid back the same within 20 days of withdrawal. Here, you’ll be charged interest on $25,000 for 20 days only irrespective of having a limit of $100,000.
Now say in month 2, you used the entire $100,000 and paid back $50,000 within 15 days. Again after 5 days you used another $25,000 and paid back the entire $75,000 in 10 days. Here, you’ll be charged interest on $100,000 for 15 days, then on $50,000 for 5 days and on $75,000 for 10 days.
Also, though you had a business line of credit limit of just $100,000 but overall utilisation for the month was $125,000. Hence, you can maximise your utilisation by efficiently churning the funds.
You also have an option from few lenders to get every drawing amortised over a period of time and pay weekly/monthly instalments.
Although other financing options such as Invoice Financing and Debtor Financing may work closely as a Business Line of Credit on a fundamental level, there are differences you should know before choosing one. The key features and differences can be seen as below.
Although other financing options such as Invoice Financing and Debtor Financing may work closely as a Business Line of Credit on a fundamental level, there are differences you should know before choosing one. The key features and differences can be seen as below.
Generally, you can get limits up to $250k, basis low documentation. You only need to provide the following documents in most of the cases.
For a business line of credit more than $250k, you may require submitting the following additional documents
The borrowing credit limit for a line of credit depends on various factors
Generally, lenders will consider the maximum line of credit amount by evaluating a business’s cash flow and how quick it can repay the borrowing amounts it utilises. A higher average monthly revenue can provide you access to greater maximum amount of line of credit
To lenders, “time in business” could be evaluated as a factor of the momentum in the business. Usually, lenders assume businesses that have been operating for more than a year are more likely to take on more debt obligations and have much more balanced cash flow activities.
Though you can get a business line of credit up to a certain limit without any security, the lenders place higher weightage if a business or its directors are asset backed. It helps them in getting a higher loan amount with better terms.
The maximum amount of line of credit that is approved may differ based on the industry that a business operates in. This is because every industry has different methods of collecting payments from their customers. If your business is mainly selling products directly to end-users (B2C), you may collect payments in cash or credit card, which provides you with an immediate source of revenue, which is usually favoured by lenders. On the other hand, if your business mainly makes commercial transactions with other businesses (B2B) where invoices are often used, the delay payments may be seen as a risk by lenders, which could impact the maximum amount of line of credit you can borrow.
For an unsecured line of credit, borrowers’ credit score becomes a significant factor for consideration of the loan amount. A higher credit score means more confidence for the lender to approve a higher maximum amount of line of credit, and vice-versa.
With all being said, please do not let the factors discussed above intimidate you to reach out to us. Broc Finance believes every company has unique strengths on its own and we are here to help you to present them effectively to the lenders so that you secure the business loan you need.
A business line of credit is similar to having a credit card limit. You would be approved a line of credit limit at the start of the loan. Once the limit is set, you can utilise part or full of the funds as required and pay it back whenever you wish. You would be charged interest only for the period of utilisation of the funds.
A business line of credit may have the following borrowing costs:
Interest cost: Interest charged on the funds utilised.
Line fees: There may be a small monthly/weekly/Annual fee charged by the lenders for facilitating you a line of credit throughout the term of the loan irrespective of your utilisation. This fee is charged on top of regular interest incurred on utilisation of funds.
Drawdown Fees: Some lenders may charge a small drawdown fee on each drawdown instead of line fees. This fee is charged on top of regular interest incurred on utilisation of funds.
Most of the lenders calculate the interest on a daily utilization basis and charge monthly to the accounts.
Lenders may require you to pay the interest plus a percentage of the principal drawn on a weekly/fortnightly/monthly basis or simply amortize each drawing over a period of time (similar to term loan). Alternatively, they may give you an option to amortize it over a period of time.
Generally, the term of a business line of credit range between 1 year to 5 years. Few lenders also provide a rollover facility at the end of the term.
Lenders would run a credit check only after obtaining a consent from you.
At Broc Finance, we endeavour to get the most adequate facility suitable to the business requirements of our clients. In most of the cases logged in through us, we try to get an indicative offer from the lender for our client’s consideration before proceeding with formal application and consent to credit check. This approach helps our clients to avoid unwanted rejections and credit checks which can significantly impact their credit score.
We would be happy to answer, if you have any other questions. Please contact us.
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