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Business line of credit

With a business line of credit, you get quick access to cash for your business, and gain ultimate control by paying back funds at your own pace.

Updated

If you find your operating expenses are increasing and funds are running low, you may need quick access to cash. In this case, you could consider a business line of credit, which offers several advantages over other forms of finance. With a business line of credit, you can pay back business expenses by having access to a revolving line of credit that you can use for ongoing expenses or when business emergencies arise.

Although a business line of credit is similar to an overdraft, there are several differences, the main one being that an overdraft can only be accessed when your account goes into the negative. A line of credit can be accessed whenever you need it.

How does a line of credit for business work?

You are approved for a specific credit limit with a line of credit, and can access funds up to the amount you are approved for. You are responsible for paying back the amount you borrow, plus any fees charged by the lender. Moreover, your lender only charges you interest on the amount borrowed each month, not the entire loan amount . Depending on the lender, you may be required to put up collateral as security for the line of credit.

A business line of credit gives you control, as you can borrow only the amount you need and pay back the facility at your own pace. This added flexibility makes a business line of credit beneficial and practical for business owners. Also, it is usually cheaper than traditional credit cards.

What features come with a business line of credit?

Standard features that come with every business line of credit include:

  • Interest rate. Make sure you find out whether your lender charges a variable or fixed interest rate. Also, remember you are only charged interest on the amount you actually borrow, not on the amount you’re initially approved for.
  • Comparison rate. To help you compare your options more accurately, the comparison rate takes into account not only a lender’s interest rate but the other fees that are charged.
  • Fees. Usually, a business line of credit includes one-off fees such as application and establishment fees. They may include other fees such as annual charges, ATM and transaction fees.
  • Monthly repayments. Business lines of credit have no minimum monthly repayment as long as interest and other fees are paid each month.
  • Secured vs unsecured. Many business lines of credit need to be secured, meaning you are required to put up business or home equity as collateral for your loan.
  • Minimum loan amount. When applying for a business line of credit, be aware that some lenders require a minimum amount to be borrowed.

How to compare your options

Consider the following factors when comparing your options:

  • Can my business afford it? This is the main factor to consider. Before taking out any type of debt, make sure you calculate all associated costs and that your business’s cash flow can take on the new monthly repayments.
  • How much can I borrow? Different lenders offer varying minimum and maximum loan amounts. However, the loan amount you’re approved for depends on several factors including past credit history, requested loan amount, cash flow, assets and liabilities.
  • When will I receive my line of credit? Make sure the lender you choose is able to provide the funds when you need them. Otherwise, you are wasting time, resources and money.
  • How much will it cost me? Besides the interest rate, check to see what fees are charged, including one-off fees such as application and establishment fees. There may be ongoing fees such as loan service and annual fees.
  • How much are the repayments? Your monthly repayments are not fixed and depend on how much you want to pay back. As long as you pay the interest and other fees for the month, lenders provide great flexibility on how much of the balance you want to pay back.

Things to avoid with a business line of credit

  • Borrowing more than you can afford. With business lines of credit it is easy to borrow more than your business requires or can afford. Also, because you’re approved for a certain amount doesn’t mean you need to use it all. Lastly, never request a loan amount for more than you need. If you do this, you may find yourself quickly getting into too much debt and as a result, put your business in financial distress.
  • Taking too long to repay. With business lines of credit, you are not required to pay back the amount you borrow within a fixed period. Instead, you have the option to only pay the minimum monthly charges. However, the balance that is left unpaid accrues interest and charges, which means the longer you wait to pay back the outstanding balance, the more expensive it gets. Avoid this by paying back the balance as quickly as your finances allow.

Questions you might still have

What types of ongoing costs are there?

Lenders usually charge an annual fee, transaction fees and interest. However, ongoing costs associated with a business line of credit differ from lender to lender, so make sure you ask before agreeing to a loan.

What documents do I need to apply?

Make sure to have on-hand your identification, proof of income, business financial statements, and other personal- and business-specific information such as your business address, New Zealand Business Number (NZBN), how long you’ve been in business, etc.

How long does a business line of credit last?

There is usually no limit and it is normally valid for as long as you hold the original credit account.

Image: Shutterstock

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