What is a business line of credit?

A business line of credit is a facility that allows a business to ‘draw down’, or borrow a chosen amount of money as and when it’s needed, up to a limit.

Typically, the line of credit will be for a specific amount, say $150,000. A lender will agree to give the borrower access to these funds for a set term – Prospa’s Line of Credit is available for a 24-month term, with the option to renew.

What does ‘draw down’ mean?

Drawing down simply means withdrawing funds from a finance facility, such as a line of credit. You can draw down from the facility whenever you choose, depending on the needs of your small business at the time.

You can withdraw any amount up to your approved limit to cover various business costs as the arise. Repayments are made weekly and you’re also free to make additional repayments whenever you choose, giving you extra flexibility to manage your cash flow.

So, let’s say you have a $150,000 line of credit, and you use the Prospa portal to pay a bill and the week’s wages, drawing down a total of $10,000. You will only pay interest on that $10,000 – and only until it is repaid.

With a business line of credit, it’s a good idea to look for a truly revolving facility that will allow you to draw down and repay at any time, without having to apply for funding again. For instance, with your Prospa Line of Credit you might wish to draw down $5,000 on a Monday to cover your weekly business expenses. You can then repay this amount on the Friday when a customer pays an invoice, for example, helping to minimise interest payments.

Find out more and apply for a Prospa Line of Credit.

What should you look out for when considering a line of credit?

If you’re thinking about applying for a business line of credit, you need to be confident that you can reasonably afford to repay any funds you draw down, and the return on investment is considered. In other words, will spending this money be worthwhile for your business in the long run?

A line of credit can help businesses in a range of different industries, including professional services, retail and hospitality. For instance, a restaurant might need to employ a dozen additional staff to work on a large event. It could use the facility to pay the extra staff wages, while waiting for the client to pay the invoice.

Retail business owners can select to draw on the facility to order extra stock seasonally, such as the busy Christmas period, and repay the facility when stock is sold.

Businesses that offer their suppliers payment terms of 30, 60 or 90 days, or that needs to pay for stock before selling it, will generally be susceptible to cash flow gaps that can be supported with a line of credit.

Running a business can be unpredictable, and business owners need to be agile and flexible to keep their businesses moving. A line of credit can be an ideal tool to help prepare for unexpected cash flow gaps and to be in control of business finances. With flexible, ongoing access to funds, you can confidently manage cash flow fluctuations.