Business Line of Credit – Is it Right for my Business?

The online lenders we review here provide a fast, effective way to deliver businesses with a quick injection of cash. However, it’s not always a lump sum of cash that businesses require. Many small businesses aren’t willing to commit to a set borrowing amount but can find themselves short on  working capital from time-to-time. In these scenarios, a business line of credit is likely to prove more suitable. Fortunately, a number of Australia’s best online lenders for small business loans are also some of the best business line of credit companies. As these lenders specialise in small business finance, they are also very comfortable with providing a small business line of credit.  

What is Line of Credit?

A business line of credit provides convenient and flexible access to funds from a pre-agreed credit facility. The total size of the business line of credit is agreed at the onset of the facility so businesses don’t have to worry about credit approval each time they seek finance. Rather, businesses can simply drawdown on their existing credit facility, utilising as much of the funds as necessary, up to a pre-approved credit limit.

Loan TypeSecuritiesTermsAvg Loan SizeEstimated Interest Rate
Business Line of CreditUnsecured or Secured3-12 months$50,00014%-30%

One of the key features of a line of credit for small business is that borrowers only pay interest on the funds they draw, so businesses don’t have to pay interest on more funding than is necessary, as could be the case with a one-off small business loan.

Best Business Line of Credit Companies

#1 Lend.com.au – multi-application

If you’re already comfortable with what a small business line of credit is and how does a line of credit work then you can test your eligibility in under 60 seconds with a number of Australia’s best business line of credit companies. By applying through Lend.com.au you will receive only the most relevant line of credit solutions from over 20 online lenders, You will not get bombarded by lenders ringing you - you get to choose.

Pros
  • Funding: $5,000 to $500,000
  • Smart Matching by LendScore™
  • Instant Responses to Application
  • 97% User Satisfaction
  • Unsecured Business Loans Focused
  • Bank-Level Encryption
Cons
  • Not a lender by itself

 

#2 Prospa

  • Australia’s no.1 Online Lender
  • Line of Credit Available Between $2,000 – $150,000 (Extended from $100,000 in 2021)
  • Over 6,000 TrustPilot Reviews, rating Prospa 4.9 / 5
  • Pay Suppliers Directly from your Line of Credit
  • No Asset Security Required for Facilities under $100,000
  • Prospa review here

 

#3 GetCapital

  • Import Line of Credit, ideal for Businesses Trading Internationally
  • Facility up to $750,000. 
  • Transparent, Top-Rated Non-Bank Business Lender
  • Widest Variety of Lending Solutions out of Australia’s Online Lenders
  • Business Overdrafts and other Working Capital Facilities Available
  • GetCapital review here

 

#4 Lumi

  • Line of Credit up to $250,000
  • Trusted Direct Lender
  • Drawdown from $2,000 – $250,000
  • Repayments Available for up to 24 months
  • Quick and Easy to Access
  • Lumi review here

 

How Does a Line of Credit Work?

A Small Business Line of Credit Facility is Agreed Upfront

A line of credit for small business is generally offered to borrowers for a period of 12 months. Within the 12 months borrowers can drawdown on their credit line as many times as they like, providing that total borrowing never exceeds the size of the facility. As borrowers repay their credit line they are also eligible to reuse the facility and borrow again.

Let’s look at an example of a line of credit for small business. Let’s say a $50,000 credit limit has been agreed for an independent gym in Sydney. The gym could choose to draw all $50,000 of this limit in one go (though if this is the case a small business loan may have proved more suitable). Or they can keep the facility available for when cash flow is short or opportunities arise, for instance:

A) Gym equipment at a reduced price becomes available and the gym owner knows it’s a great deal, to finance the purchase they drawdown $15,000. Leaving $35,000 available balance on their line of credit.

B) Unexpectedly, in order to adhere to increased COVID safety measures, new PPE is required and cash flow is down as less customers able to use the gym at once. A further borrowing of $10,000 is required. Total borrowing is $25,000, leaving $25,000 available to borrow.

C) As the gym opens up again and business resumes to normal, profit allows the business to repay $15,000 on their line of credit. This means they’re still borrowing $10,000 against their line of credit but now $40,000 is available.

D) Confident the business is generating good profit again, an opportunity to expand the size of the gym comes up. Rent is increased, they need to invest in more equipment and hire new staff. To do this a further $35,000 is borrowed. Total borrowings are now at $45,000 with $5,000 balance left on the line of credit.

 

 

Whatever capital is left on a line of credit will always be available to draw in an instant – borrowers can simply drawdown on the facility within a few clicks, either online or via a lender’s app. Of course, if borrowers would prefer to speak to someone on the phone then they borrow against their line of credit simply by giving their lender a call as well. 

 

Line of Credit Loans Fees & Costs

Charges and fees will be automatically calculated, based on the amount borrowed and the interest rates agreed at the onset of the line of credit. 

Whilst borrowers only have to pay interest on the funds they use, borrowers should expect some other fees to be involved. For example, Australia’s leading online lender, Prospa, charges a $195 credit line activation fee and a $25 monthly service fee to retain access to the line of credit. These are pretty standard charges and nothing out of the ordinary (some lenders charge ongoing management fees annually as opposed to monthly) but it incentivizes borrowers to actually utilise the facility they are paying to have access to. Lenders only have a fixed amount of capital they are able to issue so will not want this tied up in under-utilised facilities. But that’s what the fees are paying for essentially – instant access to cash when it’s needed. No stresses or worries about approval, a pre-approved facility that can be drawn on instantly, agreed and renewed every 12 months.

Generally, interest on a line of credit for small businesses is more than that of a term loan so it’s definitely something to be aware of – remember borrowers are only paying interest on funds actually used though. A term loan might see borrowers paying interest on cash they have sitting in the bank.

Unsecured Small Business Line of Credit

When applying for a line of credit from a bank, borrowers will almost certainly have to offer an asset, such as residential or commercial property, in order to secure the credit line. However, many of the leading non-bank lenders are much more flexible and can issue an unsecured small business loan or unsecured line of credit. No asset security is required upfront to access a]] Prospa’s line of credit for small businesses up to $100,000 and no property security is required to access GetCapital’s working capital facility up to $250,000.

Remember, if businesses are confident in their ability to repay business line of credit loans then they may actually prefer a secured line of credit facility – it reduces the risk to the lender and thus reduces the interest rate for borrowing against the line of credit

 

Repayment Schedule and Business Line of Credit Renewal

Usually, repayments on a business line of credit are automatically debited from the borrower’s bank account every week. Once the 12-month term is up, it’s usual protocol for borrowers to complete a new assessment with their online lender to see if there have been any changes to the financial performance of the business. If approved, borrowers will be able to renew the facility and use it just as they were the previous year. If the decision is made to close the line of credit at the end of the 12-month term, then borrowers will either have to repay the facility in full or arrange further weekly payments until the balance on the line of credit is paid off. 

 

Advantages and Disadvantages to a Small Business Line of Credit

Usually, a business line of credit will be one of the most important tools a business has for quick access to working capital. There are however other solutions, such as invoice finance, which can achieve a similar outcome. It’s worth being aware of exactly what the benefits and disadvantages are to a line of credit:

AdvantagesDisadvantages
  • Only pay interest on funds used.
  • Facility agreed upfront – no doubts about approval each working capital is require
  • Instant access, fast liquidity.
  • Can be unsecured with non-bank lenders.
  • Covers any unexpected expenses.
  • Small ongoing fees even if the facility is not used.
  • Can be higher interest than a standard loan.
  • Not the only working capital solution out there.

 

Final Word – Small Business Line of Credit

Given the uncertain times we find ourselves living in, it’s never been more important to establish a working capital facility that SMEs can count on when unexpected expenses pop up. Whether it’s a small business seeking their first working capital facility or an established business looking to diversify their lending partners, then a business line of credit with a non-bank lender is a sensible move.

SMEs looking for the best business line of credit companies will find Prospa a great solution – the sheer volume of positive experiences that borrowers have had attests to this. And GetCapital is a great option for larger SMEs who have more complex funding requirements. The tech capability and staff expertise makes GetCapital one of the best business line of credit loans providers in Australia today. It is very highly rated in our small business loan comparison.