For small and medium sized enterprises (SMEs), access to the right business finance solution can be the difference between success and stagnation.
Lending specialists at ScotPac New Zealand can help your company access funding solutions, such as Invoice Finance, which can operate like a line of credit, ensuring access to the working capital needed to grow your business.
But what is a line of credit, and is it the right solution for your business? While we will break down everything you need to know, please remember that this is not financial advice and that we recommend you speak to one of our specialists for a customised consultation.
What is a Business Line of Credit?
This flexible financial solution allows businesses to access a specified limit of money in a similar way to how a credit card operates.
Your business will be able to draw the working capital it needs when it needs it and pay interest on the actual amount borrowed only. Unlike a Business Loan, the line of credit does not charge interest on the entire credit limit, but only on the credit actually drawn by the company.
At ScotPac, we can tailor a funding solution like a line of credit to suit the needs and eligibility of your business. For example, it can be secured – meaning it requires collateral – or unsecured, depending on your financial circumstances, objectives, and profile.
How does it work?
When you are approved for a line of credit, the terms of the financial solution will outline the size of the pool of funds from which you can draw.
Your business, whether funding anything from ongoing operations to capitalising on expansion opportunities, can then withdraw any amount of money up to that credit limit when you need it.
As mentioned above, this allows you to retain control over how much money you actually use and therefore how much money you are paying interest on.
What is a revolving line of credit?
Simply put, a credit line that is ‘revolving’ means that as the borrowed funds are repaid, the business can then re-draw that amount again.
With a Business Loan, for example, when you repay an amount, it brings down the principal owed and – without variation to the agreement – you cannot re-draw that amount again.
A revolving business line of credit allows you to draw and repay the funds as you need with the only cost being the agreed monthly service fees and interest on the actual amount being borrowed.
Should Your Business Apply for a Line of Credit?
Every business is different, and the right financial solution will be equally unique.
However, businesses of all sizes and across all industries can benefit from a line of credit. In particular, if you operate in an industry that experiences seasonal operations or, for other reasons, struggles with unreliable or fluctuating cash flow, a line of credit can be ideal for managing short-term working capital shortfalls.
For example, you may need to cover payroll during the ‘off-season’ or restock your inventory. A business line of credit allows you to do that, and a lot more, without paying excessive interest on a loan not needed and not utilised.
The Benefits of a Business Line of Credit
Flexibility
As a business, you can access the funds you need, when you need it and reduce the amount of interest you need to pay.
Cash Flow
The greater control over your financial solution that a line of credit offers allows you to better manage gaps in cash flow, especially during slower periods of the year or when you are awaiting payments from customers.
Control
Business lines of credit allow your business to reuse funds up to the provided limit without reapplying. This makes accessing working capital on your terms quick, easy and reliable.
Interest Rates
Secured lines of credit in particular, can often come with lower interest rates than other options, such as business credit cards, loans or unsecured solutions.
When is a Business Line of Credit Not Suitable?
A line of credit may not be the right solution for every business. There are always unique circumstances to take into account.
Risk of Overuse
Overusing a line of credit can lead to unnecessarily high interest payments that are not initially factored in by a lender and can lead to potential financial strain.
Fees
A business line of credit often involves additional costs such as establishment fees and monthly maintenance fees. While this is often well worth the value provided to a business, it may not be the best solution for all companies.
Eligibility
ScotPac leverages digital platforms and technology to streamline the application process. Nevertheless, applications are subject to financial documentation review and eligibility criteria.
Frequently Asked Questions
1. How is a business line of credit different from a business loan?
Business loans are provided as a lump sum of cash that is repaid over a fixed term. A business line of credit offers flexible access to funds up to a limit, with interest charged only on the amount that is drawn and used.
2. Can a business line of credit be unsecured?
Yes
3. What are the typical uses for a business line of credit?
Businesses often utilise a line of credit to manage cash flow, invest in new inventory, cover payroll, and fund growth and expansion.
4. When should a business apply for a line of credit?
Businesses that are financially healthy are more likely to receive approval and secure favourable terms.
Explore a Business Line of Credit Today
In summary, a business line of credit can be an invaluable tool for meeting a company’s financial needs and fuelling ongoing success. But every business should assess their specific objectives and financial situation to determine if this financing option is the right fit.
Luckily, the ScotPac team is here to help. To discuss your options, get in touch with our team today.
