Every NZ business owner knows that managing cash flow effectively is a constant challenge. For many businesses, revenue fluctuates seasonally. Sometimes, unforeseen circumstances arise, some of which you may have experienced yourself:
- GST timing glitches in which you have to pay Inland Revenue before customers have paid you. This can create a short-term shortfall.
- Being caught off guard by provisional tax payments. Since these are calculated based on your previous year’s income (using the standard option: 105% of last year’s tax), not your available cash in the current year, you can be caught short
- Higher than expected ACC levies can create a lot of pressure on a small business. These are calculated annually based on your liable income and industry classification
- Drops in seasonal demand. Despite these, your fixed overheads remain.
- Natural hazard events like extreme weather and fires are becoming more frequent. These interrupt supply chains, damage stock, and delay operations.
We could go on, but you get the idea. This is why you need access to a flexible and affordable financial tool to raise capital when you need it.
A business line of credit provides a solution, but comes with several questions:
- What is it and how exactly does it work?
- How is it different from a traditional business loan?
- Is it right for my business model?
We’ll look at the answers to these briefly in the following short article.
What Is a Business Line of Credit?
A business line of credit is a borrowing option that allows your business to access a pre-approved amount of funds when needed, pay it back, and then access more if necessary.
The lender will prescribe a set credit limit, say, NZD 100,000, and you will only be charged interest on what you use. Once what you borrowed has been repaid, the finance again becomes available.
How Is It Different from a Traditional Business Loan?
Many businesses prefer this model to a traditional loan for several reasons:
Business loans give you a lump sum, which you then have to repay in fixed instalments over a certain term. Interest is charged on the full amount owing.
A business line of credit lets you pay interest on the amount you draw only. Plus, the repayment terms are more flexible, and less collateral is needed.
Is It Right for My Particular Business Model?
We’ll cover the basics here, but remember, if you need custom advice, speak to our lending specialists at ScotPac. We’ve been assisting SMEs in New Zealand for over 35 years to access the right finance solutions for them.
To check if a business line of credit is the best working capital answer for you, ask and answer these questions:
What do you intend to use the finance for?
A business line of credit is great for ongoing cash flow support, but a loan would be better for a specific, big investment like purchasing new manufacturing equipment or vehicles, or fitting out a second premises.
How much money do you require?
This kind of credit may not provide enough financing for large business projects, but you will probably raise enough for a GST payment, for instance.
Can your business afford the interest and fees?
While business lines of credit give more flexible repayment terms, the total borrowing cost may be higher than a traditional loan in the long run. Be sure to calculate the total costs before signing the agreement.
How to Properly Manage a Business Line of Credit
Let’s say you’ve decided to go ahead and access a business line of credit. To get the most out of it and keep your costs as low as possible, keep the following top tips in mind:
Be sure to keep it short-term.
These tools are designed for short-term funding only to manage cash flow gaps and emergency expenses. We don’t recommend them for long-term investments.
Access only what you need.
Being disciplined will keep the interest repayments as low as possible.
Make early repayments a priority.
The sooner you repay, the better for two reasons. It will decrease interest costs, and it will replenish how much funding is available for unforeseen future crises.
Track the costs to avoid nasty surprises.
Every line of credit is accompanied by associated fees. Always discuss these with your lender first and ensure you can afford them.
Repay on time, every time.
Make this a non-negotiable, as maintaining a good repayment history will positively affect your credit score. One late or missed payment can severely damage it. Late payments are recorded by credit reporting agencies (Centrix, Equifax, and illion in New Zealand) and will appear on your credit report for future lenders to see.
Use credit wisely.
We strongly discourage small businesses from using a line of credit for everyday expenses. Instead, manage your business well and use the help strategically with the help of a budget.
Choose your credit facility carefully.
Do take the time to compare lenders. You want the best possible deal in terms of support, interest rates, and other charges.
Put sound financial systems in place.
Accessing business credit lines is not a sustainable business strategy. While we understand that every SME needs a lifeline now and then, be sure to combine it with more long-term financial management strategies to achieve real success and sustained growth.
Want More In-Depth Info About a Business Line of Credit for Your NZ SME?
We’ve seen that these lines of credit have several advantages: They’re flexible, quickly accessible, and generally useful to ensure fast working capital to assist with cash flow issues. Used carefully, they can help SMEs stay afloat and even thrive.
Currently, ScotPac supports well over 9000 businesses, giving us extensive experience and expertise in such matters. Each business is unique and needs a specific solution, so be sure to talk to our friendly experts for a tailored finance solution. We’re available to help. Don’t hesitate to contact us for a no-obligation consultation.
