What is a business line of credit?

A business line of credit is a funding facility against which businesses can draw continuously as and when they need to, up to an agreed credit limit. It differs from regular business loans in the flexibility it offers business owners.

All businesses require finance at some stage. It could be to pursue opportunities for growth, fulfil orders or just to assist with day to day cash flow needs. And there are multiple types of business finance available. Each comes with it's own unique benefits and is differently suited to companies of varying sizes and stages of growth.

Whilst a fixed-term loan is the most common form of business lending, over half of small business owners opt for a line of credit (LOC).

Differences between a fixed-term loan and a LOC

With a fixed-term loan, the total sum, plus interest must be repaid on an agreed schedule over a given amount of time. And often the funds are secured against a fixed asset, such as property or equipment. Whilst this cash up-front allows for bigger investments to be made, it offers little in the way of flexibility. The repayments must be made without fail and any additional funding requires a further application and credit check.

A line of credit differs in that an upper limit is agreed with the lender and this may be drawn-down on time and again without further application. The borrower pays back only what they have used and after payment, the approved limit returns to it's original amount. In this way, it is quite similar to an overdraft or a credit card. It is often used for the everyday operational expenses, such as cash flow and inventory.

Fixed-term loanLine of credit
Lump-sum payment up-frontApproved maximum credit limit
Paid back over timeReuse and repay
Regular fixed repaymentsMake payments on time and don't exceed limit
Used for a specific reasonUsed for working capital and day to day operational expenses
Must reapply for additional fundingNo need for reapplication

Where to get a line of credit

Traditionally, for a line of credit facility, business owners would need to go and have a chat with their local bank manager. These days, in addition to the big banks, there are a multitude of online options out there as well. These fintech lenders can often offer an automated service with a higher level of speed and flexibility.

Traditional LenderOnline Lender
Suited to established businessesAvailable to smaller businesses
Larger lines ($100k+)Loan amount from as little as $5k up to $100k
Security required (property or business assets)Security not necessarily required
May require other accounts to come with itShort term repayments, although line begins again after full repayment
Longer set-up (1-2 weeks)Quick access to funding - as fast as 24 hours
1-5 year termsHigher rates (30%+)
Rates 10-25%
Interest-only payments
Often requires a yearly clean-up payment

How to qualify for a line of credit

Whether with a traditional lender or a fintech, there are some minimum requirements they’ll ask for:

  • You'll need to have been trading for at least a year
  • You’ll have an annual turnover of at least $25k, often more
  • You’ll need a few years of trading history
  • Good credit scores are important, particularly for larger facilities
  • For larger lines of credit, collateral is required

During the application process, you’ll need to supply the following:

  • Your personal and business tax returns
  • Your bank account info
  • Your business financials (profit and loss statement, balance sheets)

Online lenders typically have looser qualifications, but you’ll need this as a minimum. Whilst it’s easier to get a loan with an online lender, it does often mean that they have higher interest rates.

Why should you consider a line of credit?

  • Cash is available at a moments notice
  • It can help smaller businesses build credit
  • No need for reapplication
  • It can help address a constant financing need
  • It is there for unexpected costs and unique purchasing opportunities

Invoice finance line of credit

With invoice finance, business owners can get access to a revolving line of credit secured against their unpaid invoices. Payment terms on invoices are often 30-45 days. This means that after supplying a product or service, businesses have to wait for payment leaving them out of pocket and creating a cash flow gap. Invoice finance (otherwise known as accounts receivable finance or debtor finance) helps by extending instant funds to cover the shortfall. It is used for working capital, to meet payroll, purchase inventory and pay for overheads and operational expenses.

To apply for invoice finance, a lender will review a business’ accounts receivable ledger and usually extend a limit of around 80% of the total. To be applicable for an invoice finance line of credit, a business will need to meet the following requirements:

  • They invoice other businesses upon completion of work
  • They operate within selected industries, such as manufacturing, recruitment or transport and logistics
  • They have at least 3 debtors
  • They do not have overly aged invoices
  • They have a minimum total ledger size of at least $10k

More information on invoice finance

The Waddle Difference

Waddle offers a modern form of invoice finance. We’ve built an innovative receivables finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.

Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.

It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital with minimal fuss. Get an offer now!