A cheap and easy way to get your business out of a cash flow crunch
No matter how much you plan and try to manage your cash flow, there comes a time when things just get tight.
At times like these, a business line of credit (LOC) facility can be a handy option to help bridge the gap in your cash flow and keep the business moving.
It’s often a cheaper option compared to getting a credit card, an overdraft facility or another business loan.
What is a business loan line of credit?
A business LOC is essentially another form of finance and you would apply for the facility as you would any other type of loan.
You don’t have to be a particularly strong borrower to qualify but you do have to show a clear business need for the limit you’re asking for.
How much can I borrow?
Qualifying for a business line of credit is similar to applying for a home loan because it is essentially another debt.
The amount you can borrow will depend on the following:
- Using a residential property as security: You can borrow up to 80% of the property value (LVR) to secure the line of credit.
- Using a commercial property as security: You can borrow anywhere between 50-80% LVR depending on the nature of the property. Commercial real estate considered non-specialised will help you to borrow more.
- Other security: Some lenders may accept a combination or residential and commercial property and business assets as security for the line of credit.
- Variable rate only: Not available on fixed rate loans.
- Minimum LOC limit: Typically $10,000.
- Maximum LOC limit: Depends on how much you’re securing with equity in your property. Some business owners have a line of credit limit up to $500,000 or higher!
- Serviceability: This basically means that your personal income is enough to cover the principal and interest payments on the LOC as well as any current debt facilities that you may currently have including your home loan and business loan. The lender will generally ask for your latest personal tax return as well as your last two years business financials.
- Purpose: Depending on the amount you’re applying for, the bank may want to know what you’re intending to use the line of credit for. Although this isn’t a specific requirement, banks like to see that they stand to make a profit through your interest repayments so they’re cautious of borrowers who don’t intend to use the LOC on a regular, ongoing basis.
Do you qualify for a business line of credit?
Call us on 1300 889 743 or complete our free assessment form to speak with one of our business loan specialists.
How does it work?
A business line of credit is an evergreen facility or revolving loan which means that it essentially acts like one giant credit card.
Unlike an overdraft facility, a business line of credit needs to be secured against an asset of some kind, such as your home (or a residential property that you own) or the commercial property from which you’re operating your business.
Depending on your security and your business needs, the bank will approve your LOC limit and an interest rate which will apply each time you draw down from the facility.
The interest rate itself will be slightly higher than the interest rate of a standard business loan but it’s also a lot less than a credit draft or overdraft facility since you’re securing the facility with a property.
You only pay interest on the amount you use!
That means you could essentially not use the facility for 6 months and pay no interest.
As long as you stay within your LOC limit, you generally won’t have to pay back any of the principal amount.
What are the benefits?
In a nutshell, the benefits of taking out a business line of credit include:
- You can draw down from the facility as you choose and don’t need to seek bank approval every time you do so.
- The interest rate is lower than a credit card or an overdraft.
- You only pay interest on the amounts you use.
- There is no set term on the facility – you simply have to make sure that you keep meeting your interest payments.
- In most cases, the business LOC is reviewed every 5 years rather than the annual review that comes with most business loans.
- You have easy access to the funds via internet banking, credit card or chequebook with all of your income and expenses running through the same loan facility.
A business line of credit is really only beneficial to business owners are cautious with their money and use the LOC only when they need it.
Interest can really stack up with this facility so you should really only consider applying for a line of credit if it’s absolutely essential in solving cash flow shortfalls during slow periods of the year.
A business line of credit can be a vital business tool if it’s used correctly!
It’s recommended you speak to a financial professional that specialises in businesses before making a decision to get a business line of credit.
Overdraft versus a line of credit
Firstly, you’ll generally get a lower interest rate with a line of credit than an overdraft facility because with an LOC you’re securing the facility with a residential or standard commercial property.
Apart from the interest rate, the other important thing to consider is how much you intend to use the business loan feature.
If you’re intending to use it on an ongoing basis during different periods of the year, then a line of credit may be a better option because you’re paying less interest.
However, if you’re not going to use it regularly and it’s just going to be for short bursts of cash flow, an overdraft might be better.
For example, the overdraft is usually a better solution if you’re only going to be using the funds for a couple of months to cover a cash flow shortfall.
It may be just to get out of a lull in winter sales if most of your trade is done in summer. This is particularly true of certain clothing stores.
After this period, you might not need to use the overdraft again so you’d be willing to pay the higher interest rate fee and avoid using your property as security.
What is the line fee?
Lines fees don’t apply to residential loans. It applies to commercial or business LOCs and as a general rule, vary depending on your line of credit limit:
- Application fee: 0.75-1.00% of the approved limit. So for a $100,000 limit, the application could be anywhere from $750-$1,000.
- Monthly account-keeping fee: Varies depending on the lender. Some lenders don’t have a monthly fee at all.
- Transaction fees: Really depends on your limit. Some lenders offer a certain number of fee-free transactions per month. This is all by negotiation and we can help you build a strong case with the right lender to make this happen.
- Interest rate: Variable rate using the 30, 60, 90 or 180-day bank bill swap rate plus a margin.
Be careful: the line fee applies to your limit
Even if you only drawdown part of your business loan, your line fee will be based on the total limit.
Line of credit facilities are very common with development loans.
Is there an annual review?
In most cases, your line of credit facility won’t be reviewed on a yearly basis. Instead, the facility will be reviewed every 5 years.
Typically, the banks will look at how you’ve been using the LOC over that period and whether you’ve used it enough to justify the loan limit.
If you’ve been using it regularly and have been making your interest payments on time, the bank will set and forget, meaning they’re ok with you continuing to use the LOC.
However, if you’ve missed a couple of repayments or you’ve only used $20,000 on a $200,000 line of credit, for instance, the bank may use those unused funds and invest it somewhere else.
They also ask you to pay back some of the principal.
Ask about a business line of credit
If you need a cheap and easy cash flow solution, a business line of credit may be just what you need.
Give us a call on 1300 889 743 or complete this online enquiry form and one of our mortgage brokers will get in touch and let you know if you qualify.
We will find you a lender that will offer you the best interest rate and terms based on your situation.
Find out more about the business loan solutions that we can help you with.