Types of business finance

What is a business line of credit?

All businesses require finance at some stage. It could be to pursue growth opportunities, fulfil orders, or assist with day-to-day cash flow needs. There are multiple types of business finance available to help, and each option comes with unique benefits and is differently suited to companies of varying sizes and stages of growth. A business line of credit is a popular option - check out our guide to see if this is right for you.

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A business line of credit is a funding facility against which businesses can draw continuously as and when they need to up to an agreed credit limit. It differs from regular business loans in the flexibility it offers business owners.

Whilst a fixed-term loan is the most common form of business lending, over half of small business owners opt for a line of credit (LOC).

How does a business line of credit work?

A business line of credit is a revolving loan that allows you to borrow money as needed. It's essentially a credit card for your business, but with some key differences.

A business line of credit has a set limit that can be drawn down as needed. You don't have to worry about paying back the entire balance at once; you simply pay off what you borrow each month and then can get more funds when you need them.

Differences between a fixed-term loan and a LOC

With a fixed-term loan, the total sum, plus interest must be repaid on an agreed schedule over a given amount of time. And often, the funds are secured against a fixed asset, such as property or equipment. Whilst this cash up-front allows for more considerable investments to be made; it offers little in the way of flexibility. The repayments must be made without fail, and any further funding requires a further application and credit checks.

A line of credit differs in that an upper limit is agreed with the lender, and this may be drawn down on time and again without further application. The borrower pays back only what they have used, and after payment, the approved limit returns to its original amount. In this way, it works similarly to an overdraft or a credit card. It is often used for day-to-day operational expenses, such as cash flow and inventory.

Table Example
Fixed-term loan Line of credit
Lump-sum payment up-front Approved maximum credit limit
Paid back over time Reuse and repay
Regular fixed repayments Make payments on time and don't exceed the limit
Used for a specific reason Used for working capital and day to day operational expenses
Must reapply for additional funding No need for reapplication

Where to get a line of credit

Traditionally, for a line of credit facility, business owners would need to go and have a chat with their local bank manager. These days, in addition to the big banks, many online lenders are also out there. These fintech lenders can often offer an automated service with higher speed and flexibility.

Table Example
Traditional Lender Online Lender
Suited to established businesses Available to smaller businesses
Larger lines ($100k+) Loan amount from as little as $5k up to $100k
Security required (property or business assets) Security not necessarily required
May require the business to open other accounts in addition to the line of credit Short-term repayments, although line begins again after full repayment
Longer set-up (1-2 weeks) Quick access to funding - as fast as 24 hours
Rates 10-25% Higher rates (30%+)
1-5 year terms
Interest-only payments

How to qualify for a business line of credit

Whether with a traditional lender or a fintech, there are some minimum requirements they’ll ask for:

  • You'll need to have been trading for at least a year
  • You’ll have an annual turnover of at least $25k (often more)
  • You’ll need a few years of trading history
  • Good credit scores are important, particularly for larger facilities
  • For larger lines of credit, collateral is required

During the application process, you’ll need to supply the following:

  • Your personal and business tax returns
  • Your bank account info
  • Your business financials (profit and loss statement, balance sheets)

Online lenders typically have looser qualifications, but you'll need this as a minimum. Whilst it's easier to get a loan with an online lender, it often means higher interest rates.

Invoice finance line of credit

With invoice finance, business owners can access a revolving line of credit secured against unpaid invoices. Payment terms on invoices are often 30-45 days. This means that after a good or service has been supplied, businesses have to wait for payment, leaving them out of pocket and creating a cash flow gap. Invoice finance, also known as accounts receivable or debtor finance, helps by extending instant funds. It is used for working capital, to meet payroll, purchase inventory and pay for overheads and operational expenses.

To apply for invoice finance, a lender will review a business' accounts receivable ledger and usually extend a limit of around 80-90% of the total.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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