Saroj Shah
04 Jan, 2022
If only there was a credit card, which could be used to cover the minor day-to-day business-related expenses, like inventory and expansion; it could help the owner to minimize the capital deficit. Well, that’s what they call a business line of credit. It is one of the most beneficial forms of business loans or business financing for SMEs in Australia.
If you are new to the world of business or have limited knowledge of how financing works, we will give you quick know-how on a business line of credit in Australia, touching all the basics on the topic.
Understanding the Concept of Business Line of Credit
A business line of credit is a financial commitment between the lender and the borrower on an ongoing business loan with a credit limit.
The business owner can use it to:
- Re-stock inventory;
- Pay off the utilities;
- Buy office equipment, or;
- To cover expansion costs, and likewise.
The lender charges the interest rate on the used funds only.
A business line of credit offers financial relief to businesses going through some capital deficit, balancing the cash flow.
The eligibility to apply for a business line of credit is:
- Proof of an active Australian Business Number.
- A minimum monthly turnover of $10000.
- A trading history of 12 months or more.
Advantages of Business Line of Credit
Unlike other business loans, a business line of credit can be sourced faster and fulfil the regular funding needs of a business. Why is it more beneficial than typical business loans?
- The business owner has the flexibility to utilize the funds whenever in need.
- A business line of credit does not necessarily require security or collateral.
- The borrower has to only pay interest for the funds utilized and not the entire credit line.
- The credit can be paid off when the borrower no longer needs more funds for the business.
- A business line of credit has a facility term of 5 years, which can be of great relief to the borrower running a new or small business.
Is it the same as Business Term Loan?
Many business owners applying for a credit line the first time confuse it with a business term loan. They are not the same, here’s why;
- Unlike a business term loan with a one-off drawdown policy, a business line of credit comes with a redraw facility.
- There is no early repayment penalty in a business line of credit as a business term loan.
- While a business term loan is a fixed loan, a business line of credit generally comes with an open-ended loan term with renewal facility.
It can be said with certainty that a business line of credit has a more flexible approach compared to a business term loan.
Concluding Note
To summarize, the business line of credit in Australia gives start-ups and small businesses, easy and instant access to cash flow and replenish any deficit in the capital reserve. However, first, you need is to consult with a finance broker to gain access to the right lenders and business loans to suffice your funding needs.