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Line of Credit Loan vs. Credit Cards: What’s best for your business?

Line of Credit Loan vs. Credit Cards

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Small business owners are very good at multitasking, jumping from serving customers, training staff, admin work and more! The-day-to-day can vary greatly depending on the business type however most will require access to steady cash flow. There will always be incidental expenses, such as equipment needing repair or the need to increase stock over the seasonal period. Occasionally there may also be a reduction in income, and cash flow concerns can keep a business owner up at night. But luckily it doesn’t have to.

There are many ways to fund a business, some of these can be business loans from an online lender, traditional bank loans, credit cards, or a business line of credit. Let’s explore what a business line of credit is, what the differences are to a normal credit card and how a line of credit can benefit a business.

What is a credit card?

Simply a credit card is a plastic card with a metal strip. which allows someone to buy goods without cash. Each card has a limit attached to it and when you draw down on the funds by making a purchase you can pay interest on the amount loaned. Each card is unique and the issuer of the card, the bank, transfers the payment to the place you have made the purchase from.

The amount you can borrow on a credit card as an individual is normally up to $20,000. A business could also have a business credit card. There is usually a minimum monthly repayment amount required and a time limit to pay the credit card bill.

If you don’t pay the full amount you have borrowed on time, there will be interest required to be paid. For individuals, using a credit card is one of the most common ways of electronic payment.

How could a credit card benefit your business?

Separate your personal and business expenses

Having a business credit card will help keep track of business transactions, separating personal expenses. This can be very useful when it comes to tax time.

Helps with cash flow 

Having an extra source of money is always handy to assist with the day-to-day expenses and also any extra expenses that pop up. Having staff appointed credit cards with limits can provide your team with more autonomy when it comes to business expenses. Rather than having to come to you for minor costs such as needing extra pens.

Startup business solution

For startups or entrepreneurs who don’t have a minimum of 6 months trading history, a credit card could be a good option. If you don’t qualify for a traditional business loan or a line of credit, a credit card could provide some funding for your business as you get more established.

What is a line of credit loan?

For a business that has been operating for more than 6 months, a business line of credit could be very beneficial. A line of credit loan differs from other loan types in that you only pay interest on the amount you borrow from your line of credit. This type of loan can be larger than that of a credit card. The amount can be anywhere from $5,000 – $500,000, depending on the lender.

The line of credit gives you recurring access to funds. Interest is paid only on what you have used from the total amount that has been approved by the lender. The interest rate for a line of credit loan can be less than that of a credit card as well.

Let’s look at an example, a business may be approved for a line of credit of $50,000, this amount then sits in a separate bank account that the business has access to. The business could then decide to use $5,000 of the line of credit loan to replace necessary equipment for the business. The drawdown of $5,000, means there will be $45,000 remaining. Interest will only be paid on the $5,000 borrowed until the $5,000 is repaid.

A business has the flexibility to repay some of the money borrowed, such as $2,000 of the $5,000 drawn. Therefore it will pay interest on the $3,000. Simply, it is a way to have access to extra cash flow if and whenever your business needs it.

How can a line of credit loan benefit your business?

Easy and flexible access to funds

One of the main benefits of a line of credit loan is its flexibility and empowering approach to loaning money. You can apply for a business line of credit if your business has been operating for 6 months or longer, you have an active ABN and your business is earning a minimum of $5,000 a month in revenue. If you have all of these in place, simply apply online.

A line of credit gives you the flexibility to draw down on exactly what you need, repay it in a timely way and only pay interest on what you use. It can be a good idea to take out a line of credit even if your business doesn’t necessarily need it at the time and keep it aside for contingencies. Or you can build this into your business plan. You never know when unexpected business opportunities or financial constraints can pop up.

Seasonal business benefit

This type of loan can be especially useful for a business that is more operational during certain times of the year. A line of credit loan can be useful in providing funds, enabling the business to draw down on their loan knowing they will be able to repay once the income comes in. A fruit picking company that hires staff to pick cherries for instance, in the spring season, would be able to draw down on their line of credit. Use the money to pay the workers and then when the cherries are sold, repay the line of credit. This can occur over and over again while the line of credit remains open, meaning the fruit picking company wouldn’t have to use personal funding. A line of credit could also increase with the growth of the business, so the business can continually have access to greater amounts of money.

The line of credit loan can be secured or unsecured 

A business line of credit can also be secured to an asset, having it secured can possibly bring down the cost of interest, and because you are only paying interest on the amount you are borrowing, you will most likely pay lower amounts of interest. A construction company could choose to secure their loan to a piece of equipment, helping to lower the interest rate and increase the amount borrowed. This process can be very beneficial to the construction company, which may require access to funds for a job to be completed. They know that they can repay the money borrowed once their customers pay them for the project.

Open ended loan with no set time limit

A line of credit loan does not have a fixed date that needs to be repaid, such as 12 months or 36 months like a normal business loan. It also has the benefits of the credit card as it can provide continual access to money when needed, normally with a lower interest rate than a credit card. You can borrow amounts from the line of credit in a way that suits you, and if you pay these back quickly you can keep the interest you pay low.

Overall, a business line of credit is a flexible and convenient way to manage your business cash flow. It is a pool of funds you can continually draw funding from, repaying in a time frame that suits your needs. Empowering you as you only pay interest on what you borrow from the loan. Ready to apply for your line of credit today? Find out more about Lumi’s line of credit by clicking here.

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