Key Takeaways
- A commercial line of credit is a type of revolving credit that lets businesses borrow money up to a set limit whenever they need it.
- Businesses can take money out, pay it back, and take it out again as many times as they need to, only paying interest on the amount they use.
- You can use it to manage your cash flow, pay for short term costs, or take advantage of business opportunities.
- Secured and unsecured overdrafts, equipment lines of credit, invoice finance, and trade and import finance are some of the most common types of commercial lines of credit.
- In Australia, a business's financial situation, credit score, and lender requirements all play a role in whether or not it can get a commercial line of credit.
Getting funding is a major concern for businesses all over Australia. Many businesses turn to different types of financing. One popular type of financing is a commercial line of credit, which allows businesses to draw and repay funds when they need it. What is a commercial line of credit? Let’s talk about this type of financing and how you can use one to help sustain and grow your business.
What is a Commercial Line of Credit?
A business line of credit is a way for businesses to get funds up to a set limit that they can use whenever they need. A line of credit is more like a revolving account than a term loan, which gives you a lump sum up front and requires you to pay it back on a set schedule. As long as you stay within your credit limit and make your payments on time, you can use it over and over again.
A commercial line of credit gives Australian businesses the freedom to deal with changes in working capital, pay for unexpected costs, or take advantage of growth opportunities. People often think of it as a safety net that makes sure money is always available when cash flow gets tight or an important tool to help businesses manage the cash demands of growth phases.
How Does a Business Line of Credit Work?
Once a line of credit is approved, a lender will set a maximum borrowing limit. The business can then access funds up to this limit, repay some or all of it, and use it again in the future. Interest is only charged on the amount actually borrowed, not on the total facility limit.
For example, if a business has a $200,000 line of credit but only withdraws $50,000, interest will only be charged on the $50,000 balance. Once that amount is repaid, the business can withdraw again up to the $200,000 limit.
Revolving Credit and Its Benefits
- Flexibility in cash flow management: Businesses can draw funds when revenue dips and repay quickly when income improves, helping to smooth irregular cash flow.
- Cost-effectiveness: Interest is only charged on the amount drawn, not the entire facility limit. This means businesses avoid paying for unused credit.
- Readiness for opportunities: Having funds available allows businesses to act quickly on new contracts, supplier discounts, or urgent operational needs.
- Reduced need for multiple loans: Instead of applying for separate loans for each short term need, a single revolving facility can cover multiple funding requirements.
- Supports long-term resilience: By maintaining an accessible safety net, businesses reduce the risk of financial stress during downturns or unforeseen challenges.
- Improved supplier and client relationships: Reliable access to funds helps businesses make timely payments, strengthening trust with key partners.
When Should You Use a Commercial Line of Credit?
A commercial line of credit works best for short term or recurring funding needs, not for long term capital projects. It can be drawn and paid back multiple times because it is a revolving facility. This makes it perfect for handling changes in cash flow and unexpected costs. A line of credit can be helpful for businesses in the following situations:
- Managing cash flow gaps: When customer invoices are delayed but expenses such as rent, payroll, and supplier payments still need to be met, a line of credit can bridge the gap.
- Seasonal or cyclical trading: Businesses that experience peak trading periods, such as retailers before Christmas or hospitality venues during holiday seasons, can use a line of credit to purchase additional stock or cover temporary staffing costs.
- Taking advantage of supplier discounts: Some suppliers offer discounts for early or upfront payments. Drawing on a line of credit can provide the funds to pay suppliers early, improving margins.
- Covering unexpected costs: Equipment breakdowns, urgent repairs, or sudden increases in operating costs can strain working capital. A line of credit provides a quick way to cover these without disrupting operations.
- Supporting growth opportunities: When a new contract or bulk order requires upfront investment in stock, materials, or labour, a line of credit can provide the flexibility to respond quickly without waiting for internal funds to build up.
- Balancing irregular revenue streams: Service based businesses or contractors that rely on milestone or project payments can use a line of credit to smooth income between billing cycles.
Types of Lines of Credit for Business
There are several types of lines of credit available to Australian businesses, each with different features:
Secured and Unsecured Overdrafts
An overdraft is a line of credit that is connected to a business transaction account. It lets you go below zero on the account up to a certain amount. A secured overdraft is backed by things like property or other business security. This usually means lower interest rates and higher borrowing limits. You don’t need security for an unsecured overdraft, but they usually have higher interest rates. However, unsecured options are usually approved faster and are better for urgent needs. Overdrafts are best for filling short term gaps in working capital.
Equipment Finance Lines of Credit
A line of credit for equipment financing is made just for buying business equipment. Businesses can use the facility when they need it instead of getting a new loan for each purchase. The equipment itself is often used as security for the loan. Manufacturers, transport companies, and construction companies are examples of businesses that would benefit from this kind of facility because they often need to upgrade or add to their equipment fleet.
Invoice Finance
Invoice financing is like a line of credit that is backed by unpaid customer invoices. Instead of waiting for customers to pay, a business can get a part of the invoice value up front, which helps with cash flow. Customers pay their bills, which pays off the credit and makes the facility available for use again. This kind of revolving credit is great for businesses that have long payment terms or seasonal cash flow.
Trade and Import Finance
Trade and import finance gives you a revolving line of credit to help you purchase material goods from overseas or domestically. This kind of facility is very useful for importers, wholesalers, and businesses with global supply chains because it helps them pay suppliers upfront while giving them more time to repay the line of credit.
Who Qualifies for a Commercial Line of Credit in Australia?
Eligibility requirements vary depending on the lender, but in general, businesses need to demonstrate a suitable credit profile the capacity to repay the limit. Key factors include:
- Bank statement attributes: Lenders will want to see your position over a certain period to confirm that you have enough and steady cash flow to repay the line of credit.
- Trading history: For unsecured options, many lenders prefer businesses with at least 1–2 years of trading history.
- Creditworthiness: Many lenders require an acceptable credit score of at least 500 and above.
- Security: Some lines of credit may be secured against assets, while others are unsecured.
Conclusion
Businesses in Australia that want more financial freedom can use a commercial line of credit. By giving businesses constant access to funding, it helps them keep track of their cash flow, pay for short term costs, and take advantage of growth opportunities. But it needs to be used wisely to avoid extra costs and relying on debt.
Australian business owners can make sure that a line of credit strengthens their financial stability instead of becoming a burden by learning how it works and working with the right finance partner.
Disclaimer: Loans and their accompanying benefits are available only to those who qualify for them and have been approved. Though we put a lot of care into writing this article, the information presented within is general and doesn’t consider your unique situation. It is not meant to serve as a substitute for professional advice, and you should not rely on it solely for any major financial decisions. You should always consult with a professional when you’re dealing with finance, tax, and accounting matters.
Get The Right Funding For Your Business
A commercial line of credit can help your business cover important costs and go after growth opportunities. Finding the right lender is key to getting the best deal for your line of credit. Dark Horse Financial helps businesses all over Australia find the best lenders with competitive rates and customisable terms. Send us an enquiry to get started.
