MOTIVE FINANCE

Get In Touch!

What is a business Line of credit and how does it work? (Simply Explained)

Jun 24, 2024

business line of credit explained for australian small businesses

The Lowdown on Business Lines of Credit

When it comes to business finance, flexibility and agility are key. Whether you’re an entrepreneur or a seasoned business owner, having access to capital when needed most can make all the difference to your business’s success and sustainability.

This is where a business line of credit becomes invaluable.

Let’s break it down.

What’s a Business Line of Credit?

Think of a business line of credit like a financial safety net. It’s a loan that gives your business access to funds up to a certain limit, which you can draw on whenever you need. It’s not a lump sum loan – it’s more like a ‘pre-approved credit card’ for your business. You don’t have to use it, but it’s there if you need it.

How Does It Work?

Once you’re approved, you get a credit limit – say $20,000. You can draw from this as needed, and you only pay interest on what you actually borrow. Once you repay the borrowed amount, those funds are available to you again, just like a credit card. It’s flexible and it’s there for when unexpected expenses or opportunities arise.

When Should You Consider a Business Line of Credit?

Here are some signs it might be the right move for your business:

  1. Cash Flow Management: Got seasonal ups and downs? A line of credit can smooth out those cash flow gaps, ensuring you can cover expenses during lean periods without dipping into savings.

  2. Fund Flexibility: Whether it’s investing in new equipment, launching a marketing campaign, or jumping on a growth opportunity, a line of credit lets you access funds quickly and react to changing circumstances.

  3. Inventory Expansion: If you need to buy more inventory, take advantage of bulk discounts, or ramp up production, a line of credit can provide the capital you need.

Secured vs. Unsecured Lines of Credit

Secured: Backed by collateral like inventory, equipment, or real estate. Generally offers lower interest rates and higher credit limits.

Unsecured: No collateral needed, but expect higher interest rates and stricter eligibility criteria.

Things to Consider Before Applying

Why Do You Need It?: Look at your business’s financial landscape. Are you facing cash flow challenges or looking to seize growth opportunities?

Repayments: Have a repayment plan in place. Missing payments can harm your credit score and your relationship with the lender.

Is a Business Loan Better?: Sometimes a traditional term loan might be more suitable, especially for large, one-time expenses.

Final Thoughts

A business line of credit can be a game-changer for managing cash flow and seizing opportunities. It’s about having financial flexibility to navigate the ups and downs of running a business.

Need help figuring out if a business line of credit is right for you?

Let’s chat.

Book a free strategy call today and let’s explore the best options for your business.

© 2024 Motive Finance PTY LTD - ACN 662973444

We're CAFBA & MFAA-accredited Finance Brokerage

Important: Any advice on this website is of a general nature only and has not been tailored to your personal circumstances.